Unintended consequences: How NIL in college sports has raised questions about nonprofits

2024-07-31 12:24:04

NEW YORK (AP) — Three years into the new age of college sports, where athletes are allowed to profit from their successes through name, image and likeness deals, everyone is still trying to find out what the new normal will be.

Greg Sankey, commissioner of the Southeastern Conference, called it “uncharted waters of change” in July at SEC Media Days in Dallas, as college football season approaches. “Anytime you go through a reset, it is difficult,” said Sankey, whose conference not only includes perennial powerhouses Georgia and Alabama, but, as of this year, Texas and Oklahoma, as well.

Those uncharted waters aren’t limited to football. The complicated, often murky, world of NIL has touched not just every corner of college sports, but also had an unanticipated effect on the charitable organizations that popped up to help players secure these sponsorship deals.

The basic question NIL raises for nonprofits is: What is charitable about paying college players?

To unravel how NIL deals in college sports have anything to do with the nature of tax-exempt organizations, we have to go back to 2021. That’s when a Supreme Court decision forced the NCAA to allow players to be paid for the use of their name, image and likeness. The ruling allowed players to finally enter into sponsorship and endorsement deals — including everything from the much-anticipated EA Sports College Football 25 video game to promotional appearances for local restaurants and car dealerships.

Fallout from the Supreme Court decision continues, with rules governing NIL deals evolving in response to new lawsuits and state laws. Initially, the NCAA prohibited colleges and universities from directly paying their players, though that may soon change. But to bridge that gap, a cottage industry of outside groups popped up to facilitate contracts between boosters and athletes.

Some of those outside groups formed as companies — where fans gave them money and the groups, after taking a small cut, passed it on to the school’s athletes. In return, the athletes are supposed to perform some service for the group, like autographing merchandise or posting on social media. Other groups incorporated as nonprofit organizations and applied successfully to the Internal Revenue Service for tax-exempt status.

“The worry was there’s going to be a narrative perception from the public that this is just greedy athletes, right? So we’ve got to clean that up, and the way you do that, as always, is nonprofit work, charity work,” said Darrell Lovell, assistant professor of political science at West Texas A&M University, who has written a book about NIL initiatives.

What percentage of these new organizations are for-profit and what percentage are nonprofit? Hard to say, since no one entity is monitoring all of them. The NCAA recently contracted with a company to create a voluntary registry for agents, service providers and deals over $600, which may yield better information about the estimated $1.2 billion flowing through NIL collectives.

On the nonprofit side, however, last June, the IRS issued a memo stating that the activities of many NIL nonprofits were not tax-exempt. In essence, the agency wrote that NIL deals serve the private interests of players, but not the public good.

Phil Hackney, associate professor at the University of Pittsburgh’s law school, said the IRS offers tax-exempt status for organizations that probably should not qualify “happens more often than we might think.”

“There’s probably a lot of nonprofits that nobody’s focusing on that probably ought not have an exemption, but they do,” said Hackney, who formerly worked in the IRS’ Office of Chief Counsel.

IRS spokesperson Anthony Burke said in May that the agency has a compliance strategy to make sure NIL nonprofits are “in full compliance with the existing legal requirements,” but did not elaborate. Since January, the IRS has released three rulings denying tax-exempt status for specific, but unnamed, organizations offering NIL contracts with college players.

Some nonprofit NIL collectives continue to operate, though others have closed.

The Texas One Fund that supports the Texas Longhorns still promotes its tax-exempt status on its website and hosted a fundraising concert in the football stadium in May. It did not respond to a request for comment.

Athletes at the University of Utah last year received leases to new cars, in one of the highest profile NIL deals. The Crimson Collective, which is the school’s official NIL, is registered as a nonprofit in Utah and has successfully applied for tax-exempt status from the IRS. Its most recent tax filing from 2022 indicates that it reported having less than $50,000 in revenue.

Erin Trenbeath-Murray, vice president of philanthropy for Ken Garff Enterprises and the Crimson Collective, said the organization was not involved in facilitating the leases and that its purpose is to support other charities in the state, like Make A Wish Foundation, Huntsman Cancer Institute, Junior Achievement and other nonprofits.

The Cohesion Foundation, which supports Ohio State athletes, said it stopped collecting new donations after the IRS memo, but paid out its contracts through the end of last year. Executive director Dan Apple said the collective is currently “inactive” but hasn’t taken down its website or publicly announced its closure in case something changes again.

These nonprofits continue, in part, because large donors like to give through charitable vehicles so that they can take a tax deduction.

“Where the big dollars come in and I’m talking six figures,” said Tom Dieters, president of the nonprofit organization Charitable Gift America, “Those come from grants. From donor-advised funds. Private foundations. Charitable trusts. We’ve even got a charitable IRA rollover money. You can only get those gifts as a public charity.”

Dieters said his organization helps donors enter into NIL contracts with players at 10 schools around the country, including his alma mater, Michigan State. In return, athletes promote Charitable Gift America — through social media posts, for example.

“We’re not unlike a car dealership that would promote their cars,” Dieters said. “We just promote philanthropy.”

Brian Mittendorf, the H.P. Wolfe Chair in accounting at Ohio State, said he sees some window where it could be possible for a tax-exempt organization to enter into NIL contracts, but it would be a tricky line to draw. A nonprofit that existed before it started offering NIL contracts still must ensure its work furthers its charitable mission, he said.

“(Organizations should) be able to demonstrate that the contracts they enter into are in furtherance of that charitable purpose and not to benefit any individuals in particular,” Mittendorf said.

In the upcoming school year, the waters remain uncharted following a $2.8 billion settlement reached between the NCAA and the nation’s five biggest conferences that could create a revenue-sharing model with their athletes. At least one school, Houston Christian, has objected in court to the settlement arguing that it will divert money to sports from schools’ core missions of education and research.

Elsewhere, Virginia recently passed a law allowing schools to make NIL deals with players. Other states are wrestling with whether players can unionize.

Hackney sees momentum for schools directly paying players somehow, though he argues that will further challenge whether the schools primarily serve a charitable education mission.

“The system that allows this major business, major TV athletic product business, to operate as a charitable activity has long been problematic,” he said, in part because until recently, the athletes doing the work have not been paid.

“Getting dollars to athletes for the real work that they do is important,” Hackney said. “But once you’re starting to pay them, you’re no longer operating a charity where you’re honestly there to educate these athletes. You’re there to pay them for a transactional business that’s not charitable anymore.”

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Associated Press coverage of philanthropy and nonprofits receives support through the AP’s collaboration with The Conversation US, with funding from Lilly Endowment Inc. The AP is solely responsible for this content. For all of AP’s philanthropy coverage, visit https://apnews.com/hub/philanthropy.

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