A conversation with Sportico’s Daniel Libit (Part 1 of 2)

Daniel Libit is an investigative reporter for Sportico—a website that well-covers the business of sports, including what at least some apparently want tax law to consider the “charity” of college sports.

In 2019, Libit co-founded The Intercollegiate, a college-sports outlet recognized for its successful vindication of transparency rights accorded by public-records laws. Previously, he reported on national politics for Politico, National Journal, The Daily, and CNBC, among other places.

Recently, Libit’s Sportico work has included coverage of entities with tax-exempt status under § 501(c)(3) of the Internal Revenue Code seeking to facilitate opportunities for college student-athletes to derive financial benefit from their “name, image, and likeness” (NIL), as well as public-university athletic departments’ creation of separate, independent, private (c)(3) groups to act as deal-making proxies and signatories with outside contractors and endorsers, among other things.

Libit was kind enough to join me for a recorded conversation last week. The just less than 15-minute video linked here is the first part of our discussion; the second will is here. During the first part, we talk about the growing flow of money in college sports—including through tax-incentivized, nonprofit entities with charitable status.

Purposes, and deception about them

“I always thought it’d be interesting to cover an athletic department at a public university as I would investigate political stories and really avail myself of public-records opportunities and kind of treat it with a prevailing skepticism,” Libit tells me. “What is what is this creature, this creature of college sports, and what does it say about itself and what is the truth about itself? What does it serve and how does it relate both to the state in which it exists and the university in which it exists?”

He says,

What I was interested in about college athletics—the off-the-field stories, the financial stories, the legal stories—have now all moved into the mainstream. This is no longer the pet curiosities of economists and activists and legal scholars. … You go to ESPN.com and you click on the college-sports page and invariably, a number of the stories are going to be about antitrust law or, you know, the finances of college sports.

More largely, “we’re looking at this explosion in terms of the wealth of college athletics at the same time we’re looking at this higher-education crisis,” according to Libit. “The fundamental purpose of a university now seems to be an open question and so, looking at those two things in concert, I think, has also changed the way I perceive college athletics and others do, too.” The country is having “a real reconciliation about college sports while it’s having a real reconciliation about higher education in general.”

Many would say the big problems arising from so much more money in college athletics began four years ago when the National Collegiate Athletic Association (NCAA)—itself a (c)(3)—first allowed athletes to make outside NIL money. However, “college sports was just teeming with money and individuals were profiting heavily off college athletics for decades before then,” Libit notes. Now, “it is obviously exploding. … [P]eople, I think, have only really started to pay attention now that it’s being kind of thrown in their faces, with the way that college athletes are getting compensated.

“My skeptical view of college sports is it and the custodians of it, the people who led it, were largely lying about its purpose,” he says.

I mean, it’s a business. It’s been a business for a while. It’s made companies and universities, individuals, a lot of money. And we’ve been pretending that it’s something else, something more special or sacred or academic … that this is a for like a public trust.

And that’s not to discount that. There is an element of that. I mean it is community-building. It definitely has a kind of a place in the culture. … [B]ut it has been and should be considered as a multibillion-dollar business.

Loopholes, winks, and a joke

A (c)(3) nonprofit NIL collective solicits, accepts, and pools tax-deductible contributions to fund NIL opportunities for college athletes, typically in partnership with other charities or for charitable causes. They are independent from schools, but are almost always established by alumni and supporters—seemingly, perhaps principally?, to fund NIL deals for and payment to athletes playing for teams of the school with which they’re affiliated. As (c)(3)s, though, they are supposed to demonstrate to the Internal Revenue Service (IRS) that their primary purpose is charitable, not simply operating for the substantial private benefit of athletes.

As Libit has reported, the IRS’s Deputy Associate Chief Counsel circulated an advice memorandum in 2023 that called into question whether these groups “further[] an exempt purpose under section 501(c)(3)” and last year, the IRS outright denied (c)(3) status to an NIL-collective group requesting it. Dozens of other collectives that had previously attained the status still retain it.

“In the wake of the NCAA adopting their interim policies allowing athletes to do endorsement deals in July of 2021, there were all kinds of loopholes that emerged,” according to Libit. “One loophole was that as long as there was an outside entity ostensibly doing charitable work,” with which the NIL collective would cooperate, the collective “could pay college athletes.

“The whole misalignment still that exists today is that we’re saying college athletes are getting paid based on their value as endorsers of services and products, but the real value is as athletes for teams,” he continues. “They have a value to the university. They have a value to the supporters of the university. And so, so this has been a big, you know, nudge nudge wink wink everybody has I think rather consciously played over the last 45 years.

“[D]onors and boosters to programs,” Libit says,

could create these nonprofit entities to pool resources and they could pay college athletes in a way that the universities themselves could not. And many of these came on board as nonprofits in part because there was this tacit encouragement that as long as college athletes were involved in a kind of do-gooder [activity], that was passable. This was never explicitly said, but it was sort of at least tacitly said, or communicated. … They were just vehicles to pull money from boosters and supporters of programs to pay and induce college athletes to come and stay and play for their favorite programs.

After the IRS’s 2023 memorandum and (c)(3)-status denial last year, “the jig is largely up,” he adds.

The idea was one way that which these entities could gain charitable status, is that they would help facilitate college athletes to do endorsement work with other legitimate 501(c)(3)s and by doing that, they would sort of be riding on the charitable back of these other entities. But yeah, I mean, it was a joke.

In addition to the remaining NIL collectives, there also remain other and there likely will be new nonprofit flows of money in the business of college sports. Why the policy deference to college-sports nonprofitdom? It’s “just really a product of history and the sacred status that college sports has,” Libit says. “Members of Congress have had opportunities” to reform,

and some members of Congress have even raised concerns about, the general nonprofit patina over college sports. But we like college sports, they like college sports, their constituents like college sports. It’s never been something that’s really galvanized politicians in the past to really clamp down on and to call out the legitimacy of the charitable aspect of it.

In the conversation’s second part, he discusses further factors surrounding potential reform, along with newer and likely forthcoming flows of college-sports money—including nonprofit ones, but others too.

Source: https://capitalresearch.org/article/a-conversation-with-sporticos-daniel-libit-part-1-of-2/