Student-athlete NIL collective denied 501(c)(3) exemption for serving private interests

Plain-English summary

An organization applied for 501(c)(3) charitable status using the streamlined Form 1023-EZ. Its stated mission was to help a school's student athletes use their Name, Image and Likeness (NIL) rights by doing paid community-service events, an arrangement common among college "NIL collectives." The organization paid the athletes for completing a set number of volunteer hours, spent all its donation revenue on those payments, and its board covered other expenses. The IRS determined the group flunks the "operational test": its primary purpose is to pay student athletes for the use of their NIL, which serves the athletes' private interests rather than a public charitable interest. Citing cases and rulings that a single substantial non-exempt purpose defeats exemption, the IRS issued a final adverse determination that the organization does not qualify under 501(c)(3), meaning donors generally cannot deduct contributions to it. The organization did not file a protest within 30 days, so the proposed denial became final. This reflects the IRS's skeptical stance toward NIL collectives seeking charity status.

Ruling snapshot

• Question: Does an organization that pays a school's student athletes to do community-service events using their NIL qualify for exemption under section 501(c)(3)?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(c), (d); Rev. Ruls. 61-170, 76-152; Better Business Bureau v. United States, 326 U.S. 279; B.S.W. Group v. Commissioner, 70 T.C. 352; Miss Georgia Scholarship Fund v. Commissioner, 72 T.C. 267

Full text (IRS public release)

This document is a scan; the text below was proofread from OCR output. Obvious OCR misreads were corrected and wording kept verbatim; unreadable spots are marked [illegible].

[illegible]
IRS
          Department of the Treasury
          Internal Revenue Service
          Tax Exempt and Government Entities
                                                                              Date:
                                                                               09/25/2024
                                                                              Employer ID number:


                                                                              Person to contact:



 Release Number: 202451019
 Release Date: 12/20/2024
 UIL Code: 501.03-30,
 501.32-01, 501.33-00,
 501.35-00, 503.00-00



Dear
 This letter is our final determination that you don't qualify for exemption from federal income tax under Internal
 Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent
 you a proposed adverse determination in response to your application. The proposed adverse determination
 explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we
 didn't receive a protest within the required 30 days, the proposed determination is now final.
Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't
deduct contributions to you under IRC Section 170.
We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by
sending them a copy of this final letter along with the proposed determination letter.
You must file the federal income tax forms for the tax years shown above within 30 days from the date of this
letter unless you request an extension of time to file. For further instructions, forms, and information, visit
www.irs.gov.
We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the
enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how
to notify us. If you agree with our deletions, you don't need to take any further action.
If you have questions about this letter, you can call the contact person shown above. If you have questions
about your federal income tax status and responsibilities, call our customer service number at 800-829-1040
(TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933.




                                                                                          Letter 4038 (Rev. 11-2021)
                                                                                          Catalog Number 47632S
                       Sincerely,


                       Stephen A. Martin
                       Director, Exempt Organizations
                       Rulings and Agreements
Enclosures:
Letter 437
Redacted Letter 4034
Letter 4038




                                                   Letter 4038 (Rev. 11-2021)
                                                   Catalog Number 47632S
           Department of the Treasury
           Internal Revenue Service

 IRS
                                                                                Date: 08/01/2024

                                                                                Employer ID number:

                                                                                Person to contact:
                                                                                 Name:
                                                                                 ID number:
                                                                                 Telephone:
                                                                                 Fax:




Legend:                                                                       UIL:
C = Date                                                                       501.03-30
D = State                                                                      501.32-01
F = School                                                                     501.33-00
G = Organization                                                               501.35-00
h = number                                                                     503.00-00
j dollars = amount
k dollars = amount

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts
You submitted Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code.

You attest that you were incorporated on C in the state of D. You attest that you have the necessary organizing
document that your organizing document limits your purposes to one or more exempt purposes within the
meaning of the IRC Section 501(c)(3), that your organizing document does not expressly empower you to
engage in activities, other than an insubstantial part, that are not in furtherance of one or more exempt purposes,
and that your organizing document contains the dissolution provision required under Section 501(c)(3).

You attest that you are organized and operated exclusively to further charitable purposes. You attest that you
have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3). Specifically, you
attest you will:
    • Refrain from supporting or opposing candidates in political campaigns in any way


                                                                                         Letter 4034 (Rev. 01-2021)
                                                                                         Catalog Number 47628K
                                                         2

    •   Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
        individuals
    •   Not further non-exempt purposes (such as purposes that benefit private interests) more than
        insubstantially
    •   Not be organized or operated for the primary purpose of conducting a trade or business that is not related
        to your exempt purpose(s)
    •   Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you
        made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations
        outlined in Section 501(h)
    •   Not provide commercial-type insurance as a substantial part of your activities

You indicated that your mission is to support F's student athletes with Name, Image and Likeness (NIL)
compliance requirements.

Detailed information was subsequently requested.

Your mission is to provide F's student athletes the opportunity to enhance their college experience through
volunteering in community services and non-profit organizations, using their NIL. The activities are conducted
at selected agencies approved by your board of directors. To be eligible to participate in your program, student
athletes must be full-time students in good standing at F, and members of its athlete program. Student athletes
receive compensation for volunteering for such events. You ensure that all events meet the compliance
requirements set forth by G. You have a selection committee who chooses worthy participants.

Your contract indicates that you will use F's student athletes NIL to help them make a difference in the
community in the light of G's NIL policy, approved in               . The participating athletes are required to
complete h hours of service for compensation of j dollars. A coach is always present at the events and keeps
record of the hours volunteered. If an athlete fails to complete the hourly requirement, you can withhold all or a
portion of the compensation. Any participating athlete is limited to compensation of up to k dollars per year.

You publicize your program by contacting individuals and corporations in person. You do not use advertising or
promotional materials. Your income is from donations. All your revenue is for the payment of the student
athletes, and all outside expenses are paid by your board members, who are not reimbursed.

Law
IRC Section 501(c)(3) provides, in part, for the exemption from Federal income tax to organizations organized
and operated exclusively for charitable, religious, or educational purposes, where no part of the net earnings
inures to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, to be exempt as an organization described in IRC
Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the
purposes specified in such section. If an organization fails to meet either the organizational or operational test,
it is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively
for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of




                                                                                        Letter 4034 (Rev. 01-2021)
                                                                                       Catalog Number 47628K
                                                          3

such exempt purposes specified in IRC Section 501(c)(3). An organization will not be so regarded if more than
an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for exempt purposes unless it serves a public rather than a private interest. To meet this
requirement, an organization must establish that it is not organized or operated for the benefit of private
interests such as designated individuals, the creator or his family, shareholders of the organization, or persons
controlled, directly or indirectly, by such private interests.

Revenue Ruling 61-170, 1961-2 C.B. 112, held that an association of professional nurses that operated a nurses'
registry to provide greater employment opportunities to its members and to organize an adequate and available
nursing placement service for the community did not qualify for exemption under IRC Section 501(c)(3). By
operating an employment service principally for the benefit of its members, the organization served private
interests more than insubstantially and consequently was not organized and operated exclusively for charitable
or other exempt purposes.

Rev. Rul. 76-152, 1976-1 C.B. 151, held that an organization formed by art patrons to promote community
understanding of modern art trends did not qualify for exemption under IRC Section 501(c)(3). The
organization exhibited and sold the artwork of local artists, who received 90 percent of sales proceeds. This
provision of direct benefits served the private interests of the artists and could not be dismissed as being merely
incidental to its other purposes and activities, and therefore the organization was not operated exclusively for
educational purposes.

In Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945), the court held an organization
qualifying for exemption under IRC Section 501(c)(3) must be exclusively devoted to furthering Section
501(c)(3) purposes and the presence of a single substantial non-exempt purpose will prohibit exemption
qualification regardless of the presence of any exempt purposes. Noting an activity can have more than one
purpose, the court also held that once a substantial non-exempt purpose is established, it is unnecessary to
determine whether there are exempt purposes because exemption is unavailable.

In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), an organization that provided managerial and
consulting services on a regular basis for a fee is a trade or business carried on for profit. The fact that services
in this case are provided at cost and solely for exempt organizations is not sufficient to characterize this activity
as charitable within the meaning of IRC Section 501(c)(3). The court stated that when applying the operational
test, under Treas. Reg. Section 1.501(c)(3)-1(c), as "operated exclusively" looks at the purpose towards which
an organization's activities are directed, and not the nature of the activities themselves. The purpose is
ultimately dispositive of the organization's right to be classified under Section 501(c)(3).

In Miss Georgia Scholarship Fund, Inc. v. Commissioner, 72 T.C. 267 (1979), the court held that an
organization whose activity was awarding scholarships to contestants in a beauty pageant did not qualify under
IRC Section 501(c)(3) because the scholarships were awarded in consideration of contractual obligations. The
court noted that if the primary purpose of the scholarships is compensatory, then petitioner does not qualify for
exempt status under Section 501(c)(3).




                                                                                         Letter 4034 (Rev. 01-2021)
                                                                                         Catalog Number 47628K
                                                           4

Application of law
IRC Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg.
Section 1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes
described in Section 501(c)(3). Based on the information submitted, we conclude you fail the operational test.

An organization is required to operate exclusively for exempt purposes to qualify for exemption under IRC
Section 501(c)(3). Exclusivity with respect to Section 501(c)(3) does not mean "solely" or "without exception"
but rather contemplates that any non-exempt activities be only incidental and less than substantial, according to
Treas. Reg. Section 1.501(c)(3)-1(c)(1). Your mission to enhance student athletes' college experience through
opportunities to participate in community and non-profit organizations events using their NIL, does not further
an exempt purpose.

Based on the facts presented, your primary purpose is to provide student athletes opportunities to be
compensated for the use of their NIL. Thus, you serve the private interests of your contracted student athletes
rather than a public interest. To qualify for exemption under IRC Section 501(c)(3), you must serve a public,
rather than a private interest, as described in Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). Because you spend all
your resources on the payment of your student athletes, you operate for their private interests.

Like the organization denied exemption in Rev. Rul. 61-170, you are operated to provide employment
opportunities for the private benefit of your contracted student athletes. Your main activity is to coordinate
community service events for student athletes to use their NIL, in exchange for compensation. Therefore, a
substantial part of your activities furthers private interests.

Like the organization denied exemption in Rev. Rul. 76-152, who directly benefitted by the exhibition and sale
of their works, the student athletes involved in your activities directly benefit from the compensation received
for the use of their NIL. Based on the fact that this is your main activity, and you will spend all your revenues
on the payment of these student athletes, this cannot be dismissed as being merely incidental, and therefore you
are not operated exclusively for exempt purposes.

In B.S.W. Group, Inc., the court found that the purpose towards which an organization's activities are directed,
and not the nature of the activities themselves, are ultimately dispositive of the organization's right to be
classified under IRC Section 501(c)(3). Your purpose is to create opportunities for student athletes to use their
NIL to enhance their recognition for doing volunteer work that is being compensated. Enhancing the
recognition of student athletes, who are being compensated for their community service, does not further an
exempt purpose.

In Miss Georgia Scholarship Fund, Inc., the court found that awarding scholarships to contestants in a beauty
pageant in consideration of contractual obligations negated the right to be recognized under IRC Section
501(c)(3). Similarly, the primary purpose of your volunteer opportunities is compensatory in nature and meant
to enhance the recognition of F's student athletes under contract, and does not serve an exempt purpose.

You might be helping charitable and non-profit causes, but the primary purpose of your operations is to enrich
the image of F's student athletes and provide them with more opportunities for monetary compensation. As
noted in Better Business Bureau of Washington, D.C., the presence of a single non-exempt purpose, if
substantial in nature, will destroy exemption regardless of the number or importance of truly exempt purposes.




                                                                                          Letter 4034 (Rev. 01-2021)
                                                                                          Catalog Number 47628K
                                                         5

Conclusion
Based on the facts and analysis above, you do not qualify for exemption under IRC Section 501(c)(3) because
you are operated for the substantial non-exempt purpose of creating opportunities for your contracted student
athletes to use their NIL in exchange for monetary compensation. You are operated for the private interests of
your contracted student athletes. Thus, you fail the operational test and are not qualified for exemption under
Section 501(c)(3).

If you agree
If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from
you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on
your income tax filing requirements.

If you don't agree
You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:
   • Your name, address, employer identification number (EIN), and a daytime phone number
   • A statement of the facts, law, and arguments supporting your position
   • A statement indicating whether you are requesting an Appeals Office conference
   • The signature of an officer, director, trustee, or other official who is authorized to sign for the
      organization or your authorized representative
   • The following declaration:
     For an officer, director, trustee, or other official who is authorized to sign for the organization:
     Under penalties of perjury, I declare that I have examined this request, or this modification to the
     request, including accompanying documents, and to the best of my knowledge and belief, the request
     or the modification contains all relevant facts relating to the request, and such facts are true, correct,
     and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we'll continue to process your case considering the information you provided. If you haven't given us a basis
for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:




                                                                                        Letter 4034 (Rev. 01-2021)
                                                                                        Catalog Number 47628K
                                                         6

       U.S. mail:                                       Street address for delivery service:

       Internal Revenue Service                         Internal Revenue Service
       EO Determinations Quality Assurance              EO Determinations Quality Assurance
       Mail Stop 6403                                   550 Main Street, Mail Stop 6403
       PO Box 2508                                      Cincinnati, OH 45202
       Cincinnati, OH 45201

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you
fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your
taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.



                                                             Sincerely,


                                                             Stephen A. Martin
                                                             Director, Exempt Organizations
                                                             Rulings and Agreements




                                                                                      Letter 4034 (Rev. 01-2021)
                                                                                      Catalog Number 47628K