IRS Says Donations Made to Nonprofit NIL Collectives Are Not Tax Exempt

[NorthEastCane]

And presumably the kids are on payroll being taxed accordingly.

Most likely, the kids are not employees, they're independent contractors. If they were employees, the organization would be required to provide a myriad of employees benefits that are provided to other employees.

It would be handled similarly to a pro sports figure signing an endorsement contract. They would receive 1099's and have to pay taxes through via schedule C. Not only do they have to pay income taxes, but they'd also have to pay employment taxes equal to both the employee and employer portion of social security tax. As a contractor, they're also able to deduct any expenses (e.g., cost of unofficial visits) they incurred to make the income.

(I hope someone has advised them to pay estimated taxes before they spend the money.)

 

[mirvin88]

Most likely, the kids are not employees, they're independent contractors. If they were employees, the organization would be required to provide a myriad of employees benefits that are provided to other employees.

It would be handled similarly to a pro sports figure signing an endorsement contract. They would receive 1099's and have to pay taxes through via schedule C. Not only do they have to pay income taxes, but they'd also have to pay employment taxes equal to both the employee and employer portion of social security tax. As a contractor, they're also able to deduct any expenses (e.g., cost of unofficial visits) they incurred to make the income.

(I hope someone has advised them to pay estimated taxes before they spend the money.)

That make sense. I’m sure they’re getting 1099s.

 

[No_Fly_Zone]

Look I would prefer it be deductible because it is easier to make 5 and 6 figures donations when they are deductible and the players will still pay taxes on the money received… but I also understand that this is not the intent of the charitable contribution deduction rule.

Of course, neither is a hollywood studio locker room to help recruit 17 year olds for sport.

I will say, however, the charities involved in NIL collectives are very real and legitimate charities and they are paying players for doing work for the charities. Not saying it makes it right… but they are real charities not BS flow through entities. At least in the case of Miami.

It arguably is when that locker room is utilized by student athletes, results in a better on-field product, and increases recognition and revenue for the university. And besides, the university retains the value of the improvement to the building/structure (and which is, again, used by student athletes). Perhaps it is a farce, but there is an argument for some ROI related to the university's exempt purpose (i.e., education/research).

These collectives, on the other hand, have no charitable purpose in and of themselves. They are business entities designed to take money from donors and distribute money to student athletes (in exchange for NIL-related services). Many collectives do end up connecting players with charities for performance on their NIL obligations (the IRS Memo took that into consideration), but even these collectives aren't engaging in some selfless act of charity (and the money itself is ending up all or mostly in the players' hands). After all, without some NIL-related performance on the contract by the players the NIL contract is violative of the NIL rules/laws.

All of that said, the IRS Memo doesn't say that every collective is non-exempt, only "that many organizations that develop paid NIL opportunities for student-athletes are not tax exempt . . . ." So it seems like they might have left a crack in the door that there may be such a thing as an exempt collective... maybe. Then again, I suspect that's just the IRS attorney trying to avoid putting her foot in her mouth and not speaking in absolutes. Either way, it'll be interesting to see what happens next, but this seems like the correct result to me.

For those interested, here's a link to the IRS Memo.

 

[Fluffhead]

I'm gonna defer to @wspcane , he is the expert on charitable organizations, but I'll also say that you can't "clean this up" by running it through a couple of organizations. If the United Way gave money to the Boy Scouts of America, and then BSA wasn't doing anything charitable except for paying a couple of athletes, it would be a problem.

There are just so many absurdities within it.

Maybe when the IRS gets done with this they can turn their talents next to “foundations”. Where’s the crook Lois Lerner when we need her?

I used to work with one of her right hand people after he left the IRS. There were a more than a handful of times that I was glad we did not have video conferences at the time while he was speaking.

 

[AmherstCane]

It arguably is when that locker room is utilized by student athletes, results in a better on-field product, and increases recognition and revenue for the university. And besides, the university retains the value of the improvement to the building/structure (and which is, again, used by student athletes). Perhaps it is a farce, but there is an argument for some ROI related to the university's exempt purpose (i.e., education/research).

These collectives, on the other hand, have no charitable purpose in and of themselves. They are business entities designed to take money from donors and distribute money to student athletes (in exchange for NIL-related services). Many collectives do end up connecting players with charities for performance on their NIL obligations (the IRS Memo took that into consideration), but even these collectives aren't engaging in some selfless act of charity (and the money itself is ending up all or mostly in the players' hands). After all, without some NIL-related performance on the contract by the players the NIL contract is violative of the NIL rules/laws.

All of that said, the IRS Memo doesn't say that every collective is non-exempt, only "that many organizations that develop paid NIL opportunities for student-athletes are not tax exempt . . . ." So it seems like they might have left a crack in the door that there may be such a thing as an exempt collective... maybe. Then again, I suspect that's just the IRS attorney trying to avoid putting her foot in her mouth and not speaking in absolutes. Either way, it'll be interesting to see what happens next, but this seems like the correct result to me.

For those interested, here's a link to the IRS Memo.

I think you’re making an argument for one and then saying no argument can be made for the other… that approach rarely leads to an accurate analysis.

Realistically they’re both complete BS - like much of our inane system of taxation.

Collectives that solely raise money for the purpose of making donations to regulated c3’s with an established charitable purpose and operation are absolutely compliant with the letter of the law and no different from family charitable trusts… unless you start looking into intent beyond the stated purpose of the org, in which case 50%+ of c3’s and charitable trusts would be revealed as shams.

 

[passitback]

This has nothing to do with the players paying taxes. The players pay taxes no matter where the money comes from. This has to do with whether the donor has to pay taxes on the money donated.

Thank you. Much appreciated. That makes more sense to me.

 

[passitback]

These are two different concepts. The employees of course owe money on taxes.

Gracias. Makes more sense. I appreciate the posts on this topic.

If TOC defers to you, I know you know you’re ****.

 

[SpikeUM]

Of course the IRS would take that hill.

Already have property taxes, sales tax, State Income Taxes (some states), marriage license fees, local school taxes, vehicle registration taxes, business registration and permit fees/taxes, waste management tax, cigarette taxes, court fees/taxes, dog tags/taxes, drivers license taxes, social security taxes, gift taxes, unemployment taxes, estate taxes, fishing license/taxes, garbage tax, gasoline tax, gun registration taxes (some states), highway toll taxes, hotel bed taxes, hunting license taxes, import taxes, airport taxes, individual health insurance taxes, inheritance taxes, insect control taxes, building inspection fees/taxes, water hookup fees/taxes, tire disposal taxes, battery disposal taxes, IRS penalty and interest fees/taxes on your taxes, Library card fees/taxes, liquor taxes, luxury taxes, Medicare taxes, parking fees/taxes, passport taxes, air transportation taxes, biodiesel taxes, recreational vehicle taxes, self-employment taxes, service charge taxes, sport stadium taxes, state park taxes, federal park taxes, tanning bed taxes, telephone excise taxes,

AND WE HAVE NOT YET MENTIONED FEDERAL INCOME TAXES.

I swear - our forefathers had more freedom under the freaking British!

You forgot AMT

 

[404Usernamenotfound]

Of course the IRS would take that hill.

Already have property taxes, sales tax, State Income Taxes (some states), marriage license fees, local school taxes, vehicle registration taxes, business registration and permit fees/taxes, waste management tax, cigarette taxes, court fees/taxes, dog tags/taxes, drivers license taxes, social security taxes, gift taxes, unemployment taxes, estate taxes, fishing license/taxes, garbage tax, gasoline tax, gun registration taxes (some states), highway toll taxes, hotel bed taxes, hunting license taxes, import taxes, airport taxes, individual health insurance taxes, inheritance taxes, insect control taxes, building inspection fees/taxes, water hookup fees/taxes, tire disposal taxes, battery disposal taxes, IRS penalty and interest fees/taxes on your taxes, Library card fees/taxes, liquor taxes, luxury taxes, Medicare taxes, parking fees/taxes, passport taxes, air transportation taxes, biodiesel taxes, recreational vehicle taxes, self-employment taxes, service charge taxes, sport stadium taxes, state park taxes, federal park taxes, tanning bed taxes, telephone excise taxes,

AND WE HAVE NOT YET MENTIONED FEDERAL INCOME TAXES.

I swear - our forefathers had more freedom under the freaking British!

Thanks for reminding me, especially today when Q2 esitmated taxes are due in 3 days

 

[SpikeUM]

It is absolutely a tax. What is stolen from me for Social Security grossly underperforms what I invest on my own, even if I actually am able to collect SS money (which I highly doubt I'll ever see).

its also taxed when received, which adds insult to injury

 

[SpikeUM]

A number of you are using the terms "tax evasion" and "money laundering" quite freely, and those arent the issues here.

 

[UMFarArcher]

Thanks for reminding me, especially today when Q2 esitmated taxes are due in 3 days

I'm just here to help!

 

[No_Fly_Zone]

I think you’re making an argument for one and then saying no argument can be made for the other… that approach rarely leads to an accurate analysis.

Realistically they’re both complete BS - like much of our inane system of taxation.

Collectives that solely raise money for the purpose of making donations to regulated c3’s with an established charitable purpose and operation are absolutely compliant with the letter of the law and no different from family charitable trusts… unless you start looking into intent beyond the stated purpose of the org, in which case 50%+ of c3’s and charitable trusts would be revealed as shams.

1. You are putting words in my mouth. I never said no argument can be made for 501(c)(3) status for collectives. What I said was they have no charitable purpose in and of themselves. This is undeniably true. Offering student-athletes service contracts for pay is not a charitable purpose, even if the collective later connects those players with charities to perform on the NIL obligations separately negotiated.

2. Our system of taxation is inane and BS. On that we agree.

3. You are skipping a key step and changing an aspect of the analysis towards family charitable trusts (my limited understanding of which is they are generally treated like private foundations). Regarding the former, not a single collective is "solely rais[ing] money for the purpose of making donations to regulated c3's with an established charitable purpose . . . ." They raise money in order to enter service contracts with student athletes, exchanging money for NIL obligations, and then they "donate" the performance obligation to partner charities. As far as whether it's different than a family charitable trust or other private foundation, I'm not a tax attorney and can't speak on specifics. But, I do know private foundations have there own specific procedures to follow, and the tax benefit to donors isn't usually as good.

I'm not sure on your 50%+ figure, but I expect a significant percentage of "charitable" organizations/trusts/foundations are BS shams (or worse, a pure scam). There's a small industry around providing information to would-be donors about charities and rating them based on their "efficiency".

 

[AmherstCane]

1. You are putting words in my mouth. I never said no argument can be made for 501(c)(3) status for collectives. What I said was they have no charitable purpose in and of themselves. This is undeniably true. Offering student-athletes service contracts for pay is not a charitable purpose, even if the collective later connects those players with charities to perform on the NIL obligations separately negotiated.

2. Our system of taxation is inane and BS. On that we agree.

3. You are skipping a key step and changing an aspect of the analysis towards family charitable trusts (my limited understanding of which is they are generally treated like private foundations). Regarding the former, not a single collective is "solely rais[ing] money for the purpose of making donations to regulated c3's with an established charitable purpose . . . ." They raise money in order to enter service contracts with student athletes, exchanging money for NIL obligations, and then they "donate" the performance obligation to partner charities. As far as whether it's different than a family charitable trust or other private foundation, I'm not a tax attorney and can't speak on specifics. But, I do know private foundations have there own specific procedures to follow, and the tax benefit to donors isn't usually as good.

I'm not sure on your 50%+ figure, but I expect a significant percentage of "charitable" organizations/trusts/foundations are BS shams (or worse, a pure scam). There's a small industry around providing information to would-be donors about charities and rating them based on their "efficiency".

. I did not mean to put words in your mouth - but I do think an argument can be made that the charitable purpose of collective c3’s is to raise funds to make donations to c3 organizations which deliver charitable services… which is the same as the tax exempt basis for charitable trusts and family foundations (and even other stand alone c3 orgs that exist to raise funds for other charities).

 

[JG13]

The way around this is strictly using US Postal Service money orders to fund NIL deals.

 

[Canedude08]

It is absolutely a tax. What is stolen from me for Social Security grossly underperforms what I invest on my own, even if I actually am able to collect SS money (which I highly doubt I'll ever see).

For the typical working stiff, SSN payments beat the crap they are going to get on the market. Why? Because the typical working stiff doesn't know a **** thing about the market and that's by design. Let's be honest here. I work in financial services and I know full well that in a world where people aren't getting pensions like they used to, SSN is an important lifeline for seniors. Should you be able to opt out of SS payments? Yes, but then again, you know that once some people opt out and then are living on the street after their investments fail, we'll be right back here with people demanding that the powers that be "Do something" to fix it.

 

[Brains]

For the typical working stiff, SSN payments beat the crap they are going to get on the market. Why? Because the typical working stiff doesn't know a **** thing about the market and that's by design. Let's be honest here. I work in financial services and I know full well that in a world where people aren't getting pensions like they used to, SSN is an important lifeline for seniors. Should you be able to opt out of SS payments? Yes, but then again, you know that once some people opt out and then are living on the street after their investments fail, we'll be right back here with people demanding that the powers that be "Do something" to fix it.

Just like every other issue, ever, I only care about my relationship with it. Everything else is noise.

 

[TheOriginalCane]

. I did not mean to put words in your mouth - but I do think an argument can be made that the charitable purpose of collective c3’s is to raise funds to make donations to c3 organizations which deliver charitable services… which is the same as the tax exempt basis for charitable trusts and family foundations (and even other stand alone c3 orgs that exist to raise funds for other charities).

Also, because I would like to reduce Cane-on-Cane violence, please be aware that people are giving assessments based on their own professional experience, not our own opinions of what could and should be the case.

Nobody is arguing their personal viewpoints, but just saying things like "I doubt this will fly based on what I've seen throughout my career".

Let's all remember that the TRUE ENEMY is the IRS and the 50 state Departments of Revenue...

 

[TheOriginalCane]

The way around this is strictly using US Postal Service money orders to fund NIL deals.

Have you ever seen the movie "The Firm"?

However, I do think it would be funny to hit some of these schools with federal crimes for misusing the Postal Service...

 

[TheOriginalCane]

For the typical working stiff, SSN payments beat the crap they are going to get on the market. Why? Because the typical working stiff doesn't know a **** thing about the market and that's by design. Let's be honest here. I work in financial services and I know full well that in a world where people aren't getting pensions like they used to, SSN is an important lifeline for seniors. Should you be able to opt out of SS payments? Yes, but then again, you know that once some people opt out and then are living on the street after their investments fail, we'll be right back here with people demanding that the powers that be "Do something" to fix it.

The next 30 For 30 is going to be "Broke 2"...

"What if I told you that you could opt out of your Social Security payments and invest your money, but that you'd be broke in 5 years?"

Look the reality that most people in 2023 refuse to admit is that Social Security was INTENDED to be one leg of a "three-legged stool" for old-age income security.

1. Your own personal retirement plan
2. Your own personal savings
3. Social security

Each of the three legs has different attributes. For instance, social security was designed to have the lowest rate of return, but the HIGHEST level of security, as it would be backed by the full faith and credit of the United States government. And it is largely exempt from income tax.

Let's not forget that 100 years ago, we did NOT have a very good system for retirement plans, and "personal savings" often involved a hollowed-out mattress.