The Tax Exempt & Government Entities Division (TE/GE) of the Internal Revenue Service (IRS) recently published a program letter outlining the Division’s priorities in fiscal year 2025. The Division lists “tax-exempt collectives utilizing Name, Image, and Likeness (NIL)” as one of its compliance enforcement priorities in the new year. Their stated goal is to assist organizations and entities in the understanding of, and compliance with, applicable tax laws. Under the heading “Smarter Enforcement,” the Division states that they plan to work with other divisions within the IRS to collaborate on highly complex and emerging issues including tax-exempt collectives utilizing NIL. See Publication 5313 (Rev. 10-2024). This smarter enforcement approach will likely see the IRS cracking down on the determination and qualification of tax-exempt status for NIL collectives moving forward.

The TE/GE letter comes more than a year after the IRS’s Chief Counsel’s Office authored a memorandum stating the Office’s opinion about whether the operation of an NIL collective furthers an exempt purpose under Section 501(c)(3) of the Internal Revenue Code of 1986. Ultimately, the Chief Counsel’s Office concluded that “[a]n organization that develops paid NIL opportunities for student-athletes will, in many cases, be operating for a substantial nonexempt purpose—serving the private interests of the student-athletes—which is more than incidental to any exempt purpose furthered by the activity.” See AM 2023-004. Generally, to qualify for tax-exempt status under Section 501(c)(3), an organization must be organized and operated exclusively for exempt purposes, such as religious, charitable, scientific, literary, or educational purposes. There are several IRS rulings that disqualify organizations from tax-exempt status following findings that the primary purpose of the respective organization was largely to serve private interests in a “more than incidental way.” It appears that the IRS believes that many, if not all, of the tax-exempt collectives utilizing NIL are operating under these “more than incidental” conditions; a belief that they plan to act on in 2025.

The industry has seen a recent shift in the NIL landscape as high-profile universities have begun to shutter their affiliate collectives. Last month, the University of Central Florida (UCF) announced that it would be parting ways with the The Kingdom, an NIL collective that provided financial means and opportunities to UCF student-athletes. Beginning July 1, 2025, UCF’s Athletic Strategic Competitiveness Team will assume complete oversight of the financials surrounding NIL deals by bringing the entire operation in-house. A number of other universities have announced the closure of their respective NIL collectives and/or nonprofit operations over the past several months including University of Alabama (Walk of Champions), University of Notre Dame (FUND), and University of Massachusetts Amherst (Midnight Ride).

This week, the BPS Foundation, the nonprofit partner organization to NIL collective operator Blueprint Sports, wrote to its partner collectives that it plans to shut down by the end of 2024. The executive director cited the “unpredictable and ever-increasing risks associated with NIL nonprofit operations” as the catalyst for the Foundation’s decision to dissolve. The TE/GE letter was likely a significant contributing factor to the BPS Foundation’s decision, which may serve as a canary in the coal mine of tax-exempt NIL collective operations in 2025. Burr & Forman can advise on the proper operation of NIL collectives, in-house University NIL programs, and any NCAA issues that may arise.