You’ve probably heard by now that on Tuesday, AJ Dybansta, apparently the top high school basketball player in the country and projected number 1 draft pick in 2026, committed to BYU. (If you hadn’t heard, well, AJ Dynabsta committed to BYU this week.)
A confession here: I don’t particularly care about basketball, college or NBA. And that may come as a shock, given that Jazz fandom is basically religion in Utah, but I grew up in the suburbs of San Diego. We had baseball (Tony Gwynn!). We had football (at least nominally). Heck, we even got a minor league hockey team while I was in high school. But no basketball.
BYU basketball wasn’t great while I was a student there. And Columbia basketball was abysmal while I was a student there.[fn1]
That’s not to say I don’t ever watch NCAA basketball. My father-in-law is a huge Dayton Flyers fan, and he takes us to a couple games a year. And cheering for the Loyola Ramblers during their couple recent tournament runs was a ton of fun, both for the basketball and for Sister Jean.
But while I’m not hugely invested in basketball qua basketball, I am surprisingly invested in this story. And why?
NIL.
Yesterday the Salt Lake Tribune published a story detailing how BYU ended up with such a sought-after recruit (a thing that, from the reactions I’m seeing, was definitely not widely expected). And, as one would expect, there were a bunch of moving parts. Apparently BYU has an excellent coaching staff. They promised a distraction-free playing environment. Utah’s a gorgeous state.
And, critically, the BYU coach promised Dybansta the same amount of NIL money he could get at Alabama, Kansas, Kansas State, or North Carolina. We’re talking a reported $5 million from BYU’s NIL collective, plus whatever other endorsement deals he manages to sign.
$5 million.
So how did we get to a world where a college athlete could get paid $5 million? And what is an NIL collective? Great questions!
To the first: in 2021, the Supreme Court found certain NCAA rules limiting the ability of college athletes to get paid anticompetitive. In essence, the ruling provided that the NCAA could prevent schools from paying athletes, but that couldn’t prevent athletes from otherwise monetizing their college athletics.
Almost immediately, college athletes started taking advantage of their name, image, and likeness (“NIL”). In short, they started endorsing stuff and getting paid to do it.
To facilitate these NIL deals, NIL collectives started popping up. Remember, the school can’t directly pay players. But these NIL collectives were often started by alum and boosters. NIL collectives are basically incorporated entities that collect money (generally from alumni and donors) and distribute it to athletes in exchange for licensing their image.
Several of these NIL collectives organized as nonprofits and filed for federal tax exemption. These tax-exempt NIL collectives pay money to athletes for the athletes to do social media posts supporting charitable organizations or to appear at fundraisers or other stuff like that. The NIL collective doesn’t charge the charity, instead using its donated funds to pay the athletes.
BYU’s NIL collective, The Royal Blue, seems to want to follow this nonprofit, tax-exempt route. On the bottom of its donations page, it has this language:
The Royal Collective will apply for tax-exempt status under Code Section 501(c)(3) and for classification as a public charity under Code Sections 509(a)(1) and 170(b)(1)(A)(vi). While The Royal Collective believes that it is operating consistently with Code Section 501(c)(3), there is no assurance of classification until receipt of a favorable determination letter from the IRS. Upon receipt of the determination letter, The Royal Collective’s tax-exemption will relate back to its date of incorporation on November 01, 2022
Now I 100% understand why it would want to be tax-exempt. As a 501(c)(3) tax-exempt organization, donors to The Royal Blue would be able to deduct their donations! And because it wouldn’t have to pay taxes on its income, it could invest whatever it wasn’t paying out, and that money would grow tax-free!
But I have bad news for The Royal Blue: it almost definitely isn’t going to get its tax exemption.
Ever since I first heard about tax-exempt NIL collectives, I’ve found them fishy. And it turns out the IRS agrees with me.
See, there are a bunch of criteria an organization must meet to qualify for tax-exempt status. And two are that it has to be formed for a qualifying tax-exempt purpose, and its non-exempt activities can’t make up more than an insubstantial part of its activities.
And paying college athletes does not qualify as a tax-exempt purpose. Does supporting other charitable organizations? Sure. But the IRS (rightly) points out that the individual support of athletes is not incidental to helping out other charitable organizations: it’s an NIL collective’s primary purpose.
Now the IRS doesn’t say that an NIL collective could never qualify. I suspect that if BYU itself did the stuff the NIL collective is doing, it would be fine. Paying student athletes would still not be an exempt purpose, but it would also not be a substantial part of what BYU did; at most, it would be incidental, and thus would not be disqualifying.
Only BYU can’t do it! The Supreme Court allowed the NCAA to prohibit schools themselves from directly paying athletes, which is the whole reason these NIL collectives popped up.
Now, it’s possible that some actual established charity could jump in and take this on. If the church itself wanted to take the place of The Royal Blue, it definitely could. Its charitable activities dwarf even BYU’s, and paying athletes for their name, image, and likeness would probably be less than a rounding error for the church.
But will the church do this? I don’t see any upside to it.
So anyway, BYU’s getting an excellent basketball player. He’s going to make at least $5 million from an unaffiliated, but closely related, private organization. But that private organization will almost definitely not qualify as a tax-exempt entity, and people who donate will not be able to deduct their donations.
And with that, happy basketball season!
[fn1] I went to one basketball game while I was at Columbia. I believe Columbia was playing Princeton. And honestly, I don’t think I’d ever attended a game with so many passes to parts of the court where literally nobody on either team was. The cheerleaders were doing something at halftime and the buzzer sounded. The refs started whistling them to stop. But they just kept going until they were done. Because what were the refs going to do, apply a penalty to the home team that ended up losing by at least 20 points?
Photo by Ben Hershey on Unsplash