The college athletics landscape is undergoing a significant transformation, particularly with introducing Name, Image, and Likeness (NIL) compensation for student-athletes. Educational institutions must proactively address this new era's potential tax implications to ensure compliance and mitigate risks.

Judicial and Regulatory Activity Affecting NIL

Current NIL policy allows student-athletes to receive compensation for their personal brand and achievements without violating NCAA rules. These athletes can earn from endorsements, autographs, apparel sales, charitable appearances, training camps, and other business ventures, as long as there's a quid pro quo for the compensation received.

In 2021, following the Supreme Court's ruling in NCAA v. Alston, the NCAA adopted an interim policy allowing athletes to receive NIL compensation. This compensation can come from NIL cooperatives, tax-exempt or for-profit entities that may be affiliated with but operate independently from a specific school. A pending settlement in Grant House v. NCAA may allow educational institutions to compensate student-athletes in some instances, including through revenue-sharing arrangements. The settlement will also require a clearinghouse to report NIL contracts exceeding $600 and enforce audits to ensure these contracts meet fair market value standards.

For these purposes, fair market value means the compensation is aligned with what similarly situated individuals—not student-athletes—receive for comparable NIL activities.

Challenges of Direct Compensation

Direct compensation by educational institutions raises several challenges:

• Payment methods: Schools must decide how to structure and process payments.
• Fair market value: Ensuring NIL contracts reflect fair market value is crucial.
• Use of third parties: Schools may need to decide whether to engage third-party entities (like NIL collectives) to manage payments on their behalf or establish new entities to handle these transactions.

As college athletics begin to resemble professional sports leagues, including potential salary caps and direct payments, questions may arise regarding educational institutions' tax-exempt status. While previous IRS rulings (Revenue Rulings 67-291, 80-295, and 80-296) have supported the idea that college athletics are integral to a university's charitable purpose, the evolving landscape could lead the IRS to revisit these rulings.

IRS Scrutiny on NIL Payments

Educational institutions must demonstrate that their NIL-related activities remain secondary and incidental to their overall exempt purpose. Recent IRS rulings, such as Private Letter Ruling 202432020 and General Legal Advice Memorandum 2023-004, suggest that NIL payments may serve a private interest rather than a charitable one, rendering them taxable to student-athletes.

While engaging a third party to manage NIL activities could mitigate risks to an institution's tax-exempt status, it doesn't eliminate challenges, such as valuing compensation and ensuring payments align with IRC Section 4958 and NCAA fair market value requirements.

Looking Ahead

The introduction of NIL compensation presents several tax challenges that educational institutions must address. Tax advisors and athletic directors should collaborate to establish clear payment structures, determine the fair market value of compensation, and ensure NIL activities remain secondary to the institution's charitable purpose.

To avoid noncompliance, institutions should seek guidance from experienced tax advisers to develop strategies that comply with federal and state tax requirements while maintaining their tax-exempt status.

How Brinker Simpson Can Help

Navigating the complexities of NIL compensation and its tax implications can be challenging for educational institutions. Brinker Simpson & Company is here to assist. Our expert team can help ensure compliance with evolving tax laws while safeguarding your institution's tax-exempt status. Contact us today for tailored guidance on NIL-related issues and tax planning strategies.