Unintended consequences: How lack of participation in college sports has raised questions about nonprofits

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

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

Those uncharted waters aren’t limited to football. The complicated and often murky world of NIL has not only touched every corner of college sports, but it’s also had an unexpected effect on the charities that have sprung up to help players land these endorsement deals.

The basic question NIL poses to nonprofits is: What’s charitable about paying college players?

To unravel how NIL deals in college sports have anything to do with the tax-exempt nature of 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 sign sponsorship and endorsement deals, which included everything from the long-awaited EA Sports College Football 25 video game to promotional appearances for local restaurants and car dealerships.

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

Some of those outside groups formed as businesses, with fans giving money to them and the groups keeping a small cut and passing it on to the school’s athletes. In exchange, the athletes are supposed to perform some service for the group, such as signing promotional items or posting on social media. Other groups formed as nonprofits and successfully petitioned the Internal Revenue Service for tax-exempt status.

“The concern was that the public was going to get the impression that these were just greedy jocks, right? So we have to fix that, and the way to do that, as always, is through nonprofit work, charity work,” said Darrell Lovell, an adjunct professor of political science at West Texas A&M University who has written a book about NIL’s efforts.

What percentage of these new organizations are for-profit and what percentage are nonprofit? It’s hard to say, since no one entity oversees them all. The NCAA recently hired a firm to create a voluntary registry of agents, service providers and agreements over $600, which may provide better insight into the estimated $1.2 billion that flows through NIL groups.

In the nonprofit sector, however, last June the IRS issued a memo stating that the activities of many nonprofit organizations that are not for profit were not tax-exempt. In essence, the agency wrote that arrangements with NIL serve the private interests of the participants, but not the public good.

Phil Hackney, an associate professor at the University of Pittsburgh School of Law, said the IRS offering tax-exempt status to organizations that probably shouldn’t qualify “is something that happens more often than we think.”

“There are probably a lot of nonprofits that nobody focuses on that probably shouldn’t have an exemption, but they do,” said Hackney, who previously worked in the IRS’s Office of Chief Counsel.

In May, IRS spokesman Anthony Burke said the agency has a compliance strategy to ensure that nonprofits that do not contract with college players “fully comply with existing statutory requirements,” but he did not elaborate. Since January, the IRS has issued three rulings denying tax-exempt status to specific, but unnamed, organizations that offer non-contract contracts with college players.

Some NIL nonprofit groups continue to operate, although others have closed.

The Texas One Fund, which supports the Texas Longhorns, continues to promote its tax-exempt status on its website and held a fundraising concert at the football stadium in May. It did not respond to a request for comment.

Last year, University of Utah athletes received new car leases, in one of the most high-profile NIL deals. Crimson Collective, which is the school’s official NIL, is registered as a nonprofit in Utah and has successfully applied for tax-exempt status with the IRS. Its most recent 2022 tax return indicates it reported having less than $50,000 in income.

Erin Trenbeath-Murray, vice president of philanthropy for Ken Garff Enterprises and Crimson Collective, said the organization was not involved in facilitating the leases and that its purpose is to support other charities in the state, such as 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 its contracts through late last year. Executive Director Dan Apple said the collective is currently “dormant,” but has not shut down its website or publicly announced its closure in case something changes again.

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

“The big revenues, and I’m talking about six figures,” said Tom Dieters, president of the nonprofit Charitable Gift America, “come from grants, donor-advised funds, private foundations, charitable trusts. We even have money for charitable donations in IRAs. You can only get those donations as a public charity.”

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

“We are no different than a car dealer promoting their cars,” Dieters said. “We simply promote philanthropy.”

Brian Mittendorf, the H.P. Wolfe Chair of Accounting at Ohio State University, said he sees a window in which a tax-exempt organization could sign NIL contracts, but it would be a difficult line to draw. A nonprofit that existed before it began offering NIL contracts must still make sure its work furthers its charitable mission, he said.

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

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

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

Hackney sees a push for schools to pay players directly in some way, though he argues that would further call into question whether schools primarily serve a charitable educational mission.

“The system that allows this important business, the important sports television merchandise business, to operate as a charitable endeavor has long been problematic,” he said, in part because until recently, the athletes doing the work have not received any payment.

“It’s important that athletes get paid for the actual work they do,” Hackney said. “But once you start paying 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 no longer charitable.”