IRS hits groups paying athletes

The rapidly expanding landscape of nonprofit, donor-backed collectives paying college athletes to promote charities has been hit with a potentially seismic disruption.

A recent 12-page memo from the Internal Revenue Service determined that, in many cases, such collectives may not qualify as tax-exempt if their main purpose is paying players instead of supporting charitable works.

If the collectives aren’t tax-exempt, the donations they collect that are used to pay quarterbacks, point guards and pitchers may not be, either.

“There’s a high likelihood we will cease operations, within the next period of months,” said Gary Marcinick, founder of the Cohension Foundation, a collective formed to connect Ohio State athletes with charities for name, image and likeness (NIL) promotional deals. “In our space, we are donor driven .... It’s not only a game changer, it’s a game ender, I think, in the vast majority of cases.”

The collectives were born out of the massive change that hit college sports in 2021 when athletes were allowed to earn money in ways that had been prohibited for decades.

Some collectives are set up as for-profit entities that help connect athletes with endorsement deals as the new market swelled into the millions and NIL became a recruiting tool. Opendorse, a company that partners with schools to help initiate, track and monitor NIL deals, projected nearly $1.2 billion flowing through the industry in 2023.

The nonprofit model was an attractive option for some donors and entrepreneurs, who tout such things as appearances at sports camps and fundraisers and social media promotions for select charities. There are an estimated 80 such collectives.

Charities gained exposure from star athletes who earned money. And donors got the promise of a tax-deductible donation.

According to the IRS, those collectives already granted tax-exempt status don’t lose it as a result of the June 9 memo. But it does lay out new guidelines for how they are expected to operate if they want to keep it.

“These collectives may face future examinations or enforcement action by the IRS,” the agency said without elaboration.