Sports Law Expert Michael LeRoy Discusses NIL, IRS With The IlliniGuys

July 4, 2023

(Editor's Note: Michael LeRoy appeared on the IlliniGuys Sports Spectacular syndicated radio show Radio - IlliniGuys.com)

Larry Smith: Michael LeRoy is a legal expert on sports labor law at the University of Illinois in Champaign-Urbana and he joins us now to explain this recent move by the Internal Revenue Service in regards to donations to Name, Image, Likeness, or NIL if you will.  Michael, good to talk to you. Welcome.

Michael LeRoy: Larry. Thank you. It's nice to be with you. And yeah, the IRS is doing its thing again.

LS: So tell us what the ruling was, what came down, and we'll get into how this affects things.

ML: Sure. Let's think of NIL in three phases. It rolled out as an endorsement kind of concept. The Cavinder twins at San Jose State signed wealthy endorsement deals. That's been the model that's used in Illinois quite a bit. Then it morphed within a year to the collective model where you had a booster organization that served as a middleman to bring money into the program, but was not directly involved the program, and I think we're all familiar with that. There's a new phase that involves legislation at the state level that has university foundations acting as collectives, maybe we'll talk about that later. However, what's happened in the NIL space is these collectives. They have different kinds of arrangements. But a common arrangement is an athlete agrees to do charitable work and is compensated well for it. So it could be showing up at an event, the athlete says come on out to the event, I'll be there, I'm looking forward to seeing you, the athlete is compensated and the amount doesn't matter, though, often it's a pretty significant amount. The IRS has ruled that these are not really charitable activities, that the collective itself is formed for the main purpose, the primary purpose of recruiting and retaining athletes. The charity part is for real, but it is secondary. And if you think about it, just on a common sense basis, we wouldn't be talking about NIL at this time, if it was strictly about charity, it is about getting athletes to come to your school.

LS: And so the IRS, as you said, is now saying we're going to tax you on that whether you are giving the money as a sponsor. Or of course, if you're receiving it that's already taxed, but it's no longer a tax-free contribution.

ML: Yeah, that's it, Larry. So they're removing the 501 (c) (3) label from these collectives. How much it changes the game, we'll have to see. Because it depends on what the donors are thinking and doing that you would think that especially with high-end donors, especially if it's corporate, giving them the thought that you could supply money or give money to the school of your choice. And let's give them the benefit of the doubt, they really want to see student-athletes involved with charitable activities. At the end of the day, they can still make that contribution, but it's not going to be a tax deduction. And, the implication is now when the collector files a tax report, they're going to have to have reportable income and pay taxes on it. So how much of a game changer I don't know, Larry, but it's something of a game changer.

Brad Sturdy: So the interesting thing about NIL was it allowed these, you know, maybe it was tax deductible was good for the boosters that helped them out with their business, and so forth. What's to stop now? What's the benefit to NIL? As opposed to the way it used to be when people were just shoveling money in McDonald's cash bags? If there's no benefit now, why wouldn't they go back to doing that?

ML: Brad, that's a great question. So to your point, the money has been moved from below the table to on top of the table. So one school of thought is people will keep on doing it, people are so motivated to see their team win and to get the best athletes, tax deduction or not, you go ahead and do it. I can speak on a personal level, you know, I used to donate to charities and take a tax deduction. I don't do it anymore, because the tax laws change. I'm still donating. I just suspect many of us are so in some sense, maybe it doesn't change. But I also think another interesting feature that's sitting on the side here is Arkansas and Texas just passed laws that allowed their state institutions who use their university foundations, who in effect serve as collectives now. When you think about this, the University of Arkansas is the first one out there. So now what you do is you donate directly to your foundation, they don't talk or they say they're not talking directly to the athletic department, that's a little hard to believe. But in any event, what's happening is, that's a 501 (c) (3), and it's been around forever. They raise hundreds of millions of dollars, sometimes billions of dollars. And so it's just another way to transact business. In 11 sec, schools are furious over what Texas A&M, Texas, and Arkansas are doing, because in their view, that directly violates NCAA rules related to recruiting with financial inducements. Now, the school is in the picture directly. And Brad that does speak to your point about the money under the table doesn't have to be under the table, they can be on the foundation's top of the table in Arkansas or in Texas. And that's remarkable. Well, but that doesn't make it okay in the eyes of the NCAA. So if Arkansas, Texas, and Texas A&M are doing that, then that means Bowling Green and Slippery Rock could get huge, some sort of infractions when they go in, they go after somebody who's not doing it. But it's at some point, I guess, do the universities worry that you know, if you've got your foundation involved, and then that turns out to look bad, or get them in trouble that would look really bad across their academic endeavors as well wouldn't make that is exactly right. And I'm a faculty member as well, as a fan of Illinois sports. That worries me a lot, our school, to the best of my knowledge, isn't involved in that, and we've played it straight. But let's just look at it from an Illinois perspective for just a minute. We're playing it straight. And we're doing well. But we're not doing perhaps as well as some of the other schools. Look at Florida, Florida is a really good illustration. Florida cannot do it as a matter of law. And I'm talking about the University of Florida. And they have fallen in football and basketball for a variety of reasons. But part of it is they're having difficulty recruiting. And so, it's just hard to see where there is any kind of consensus about what the rules of the road are. Because, look, if the next guy is cheating, and getting away with it, or not cheating, but still getting away with something you can't do in time, you know, the competition, platform changes, and you have uneven competition. And that's the world we're living in. I don't know how many teams will really shake out, but we're moving toward a consolidation of sports.

LS: Here's where I was really disappointed about this is that all we have heard since the advent of name image likeness is we hear randomly, sporadically from the highest levels of things you can't do, we're yet to hear, or yet to receive anything about what you can do. Is that coming anytime soon, where you can say, here are the 20 steps here, here's the way you do this? And here are the parameters you have to fall within. And if you do these, then you're okay.

ML: So the NCAA is a governing body and name only and we all know that. But they were forced into implementing a NIL policy, approximately July 1, 2021, approximately, eight days after they got smoked in the Supreme Court nine to nothing, where their amateur model was really basically put to rest. And so they have a skeletal policy. So we don't know what the rules of the road are. I have spent the past four years doing research in which I go into the fine print of NCAA rules. The current manual is 454 pages of fine print and Larry. I mean you know the the NIL principles take up a paragraph or two. So I'm not optimistic that we're going to get clarity about this.

Mike Cagley: So if we're not going to get clarity, what is the endgame here for this NIL model? What do you see happening in the future? It just seems to me like there wasn't a plan it was just kind of thrown together and of course you threw in the transfer portal on the COVID year and the NIL all in the same time period and it just made for just chaos in college sports. Are we gonna have something slow down and some normalcy return?

ML: I think we'll get normalcy but it's years off. So I think the next step is revenue sharing. There are laws being proposed in California, New York, and other places in Congress as well. I'm looking carefully at California. They have the revenue sharing bill that was approved by their house, it goes to the Senate, but it's not likely to pass this time. But basically, it would mandate that schools pay all athletes an equal amount at the end of their eligibility period, so it's kind of a lockbox concept. But that would really cut into revenues substantially. I don't know how schools would survive that their athletic programs, the amount that is being discussed is just, it's gonna break the bank. The brand, I think the ultimate end game is employment. There's a case called Johnson vs. NCAA, I filed a friend of the court brief on behalf of student-athletes. In that case, whether I filed or not, that case poses a real threat to the amateur model in terms of having a court ruling that would legislate employment. Now, even if the athletes win on this next go around, a decision is expected any week. We're still years off from a final ruling on that. So Brad, this reminds me of how baseball had its five baseball wars in the late 1890s and early 1900s. An enormous amount of chaos and an enormous amount of stealing athletes, one league after another. Eventually, you had the labor peace and the peace agreement and baseball, we eventually got to two leagues, and we have stability, but it took 25 years to get there. And I think college sports are involved in that kind of chaotic transition.

MC: You know, we've heard some coaches say that they think the NFL and some administrators that said in the NIL world might last three to five years. If it is a transition period, do you think it'll go immediately to the employment model? Or is there some middle state that you think might be the evolutionary step as we go towards what I know even Josh Whitman has kind of hinted at the employee model for athletes.

ML: Right, and I think many athletic directors quietly recognize that that's inevitable. But I've read these NCAA financial reports, they don't have a line for reserving money. So they're incentivized to keep spending. So, Mike, I think one possibility is this revenue sharing. But I think another possibility, and it really concerns me is that the super-elite programs, the Alabama, Georgia, Michigan, Ohio State, that cohort gets a phenomenal deal that blows away the Big 10 deal, they break away, and they pick your number 16,18,20, they form a super league, and they just have the premise that football and men's basketball are going to be professional, and they run it out from there. That's, that's another possibility. And I'm not the only person who's thought that consultants who have spoken on it on the record that see that as a possibility as well.

LS: I think we're going to keep you on speed dial. Michael LeRoy, legal expert on sports labor law, and the University of Illinois. Hey, we appreciate your time and your insight.

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