The Texas A&M NIL Loophole
So full disclosure from the jump, there will be no link. No article. And this can be tossed into the "research on my own" bucket that is so popular these days.
That said, I decided to do just that...do my own research, do some digging, talk to friends and colleagues (folks in the NCAA and compliance officers at different universities, etc.)
My goal was simple, to answer the question, "what is Texas A&M (and so many others) doing with NIL that has been so controversial, yet effective?"
The first thing you should know is the NCAA is ACTIVELY investigating multiple schools around the country right now (on NIL). They're not announcing it, but it's happening.
Second, I didn't find the answer to my question, but I did find part of it. For example, one of the things Texas A&M is doing is they've got donors lined up ready to pay for autographs, memorabilia, etc. from recruits? Market value, right?
One recruit sold an art project from class for six figures. He's an Aggie. Another held an autograph session and charged $50,000 an autograph...two people showed up, both got autographs. He's an Aggie.
As the rules are written, none of this breaks anything in Texas...technically. Obviously, it's not the intent of NIL.
Another thing I've learned is that you have to have a donor base with an appetite to give money to 17 year olds, a lot of schools do not. Most student-athletes aren't even interested in NIL right now.
In the end, the model is not sustainable and the NCAA will likely take a drastic shift in the next couple of years.
That's it, nothing ground breaking. But if you want some art...head down to College Station, TX...they've got an explosion of creativity and expression down there.
February 1st, 2022 at 12:19 PM ^
That's an interesting point. These "gifts" have to be taxable I would assume.
February 1st, 2022 at 1:55 PM ^
Warning: tax technical explanation ahead
These are not "gifts" under the tax law definition. A gift cannot be made in exchange for something of value, and NIL is valuable by definition. Autographs and similar collectibles are kind of a gray area.
A gift is tax-inefficient to the donor. They owe gift tax on the amount of the gift (leaving the lifetime exemption aside. I assume anyone willing to drop thousands on a football recruit is going to be over the exemption). For the player, the gift is tax-free, though unrestricted gifts are not NIL usage and I believe still disallowed by NCAA rules.
The donors will want these payments to be ordinary and necessary business expenses and therefore deductible. For that, they need a business that actually uses the player's NIL in advertising or some other business purpose. On the player side, this means it's taxable income, and likely subject to self-employment tax too. These are considerations the players should be thinking about now.
Some math to illustrate the difference. Leave aside the legality of direct gifts to players. Donor A wants to give money to Player X because Player X is going to play for a certain school. Donor A has a budget of $100k to spend. If they make it as a gift, they pay 40% gift tax on the gift, reducing the amount to the player to $71k (and $29k goes to pay the taxes). If they instead sign the player to an endorsement contract for their car dealership or oil and gas company or whatever, they can now pay the player $167k, take a 40% deduction worth $67k on their income taxes (Fed 37% + 3% state, assuming pass-through), and net cost is only $100k. (Of course this is simplified and makes a ton of assumptions about the tax rates and brackets, etc. You can adjust the numbers and the point stands). The player pays tax on the gross income of $167k, plus the SE tax. Even then, they still end up ahead of the gift scenario, though they do have to do some "work" to earn the compensation.
Will the IRS care? If they players are properly reporting the income, probably not. There are some rules around reasonable compensation and ordinary and necessary deductions, but they are generally not disputed since it's not worth the hassle. Only the most egregious violations of reasonableness would be argued. From the IRS's perspective, the deduction is offset by the taxable income to the player, so it's all good. They likely come out behind because of the rate differences (assuming donors are in higher brackets than players, the deduction is worth more than the income) but it's not wildly unfair so I don't think it would be worth pursuing.
February 1st, 2022 at 1:22 PM ^
The students won't have any problem with taxes. Most universities are partnering with independent third party firms staffed with service providers like attorneys, accountants, and marketing professionals. The students will have to sign the dotted line.
Hell, the paperwork you have to fill out to enroll in school and receive your scholarship is more cumbersome than taxes.
February 1st, 2022 at 2:04 PM ^
One thing I've learned from years in client service, is that you never trust the client. No matter what you do to save them from themselves, they will find a way to screw it up. The universities have tried for years to educate the students on how to comply with the rules as they existed, yet Reggie Bush, Terelle Pryor, Dez Bryant and others still broke them. Why do you think that will change now?
The partnership with law and accounting firms will make sure most people will stay within the law. But there will still be plenty who do their own thing, screw it up, and end up in trouble one way or another. This is not a reason to stop anyone from engaging in NIL activities, but we should expect stories to come out about guys who took all the money, neglected common-sense safeguards, and ended up in a bad place because of it.
February 1st, 2022 at 2:36 PM ^
If signing a document is too hard for them then how did they get enrolled in school in the first place?
February 2nd, 2022 at 1:56 PM ^
You think illiteracy stops some of these schools from recruiting players?
February 5th, 2022 at 11:12 AM ^
I'm not sure what your point is. If they are illiterate and can't figure out how to write their name on the signature line of a document prepared by a tax professional, then how did they figure out the dramatically more cumbersome and involved documentation associated with enrolling in school and accepting a scholarship in the first place?
February 1st, 2022 at 5:01 PM ^
Good point, but I guess my counterpoint is that your compliance is only as good as the third-party firm you hire and, well, those places can have issues and be corrupt as much as anyone.
February 2nd, 2022 at 9:51 AM ^
Sure but this stuff is super simple and the service providers the schools are contracting with are very good. Plenty of young adults figure out their taxes just fine, and they do it without the help of a team of CPAs and tax lawyers who specialize in their unique mode of compensation.
February 1st, 2022 at 11:18 AM ^
Hey, here's an idea. Get rid of all the TV deals, jersey sales, big stadiums, etc. No image or likeness to worry about!
February 1st, 2022 at 11:19 AM ^
The NCAA failed to have structure in place (or even in the works) when the courts ruled in the athlete's favor.... this mess is on the NCAA......
February 1st, 2022 at 11:22 AM ^
The NCAA aint doing shit to any team unless they are from the Big Ten or Pac 12. Because we are so happy to see a Penn State or USC or even a slight bump for OSU we arent realizing that these are the only conferences that the NCAA drops the hammer on.
February 1st, 2022 at 11:27 AM ^
Is there an unlimited appetite for paying six figures for stick figure drawings? I obviously don't know but I'm guessing not. I would guess NIL finds it's level at some point and that the NCAA getting involved will only delay that.
February 1st, 2022 at 11:42 AM ^
I don't see a "loophole", what I see is a coordinated effort to overpay a kid for access to his name, image, and/or likeness.
If I want to pay Cade or JJ waaaaay too much money for coming down to my dealership for an hour on Sundays to greet people, that's between me, the kid, and my accounting team. And yeah, the kid (or, if he's smart, his LLC), is going to get a 1099, so the Treasury folks will be happy and satisfied.
I am free to do this as long as I can afford it. Once you open the door, people will walk through it.
February 1st, 2022 at 11:52 AM ^
There is a lot of anger towards NIL because young, (mostly) black men are able to be paid and have some modicum of power, and their (mostly) white coaches fear losing their power over these men.
February 1st, 2022 at 12:10 PM ^
Maybe I'm wrong, but for most people who dislike the direction this is all going I doubt race has anything to do with it. I'd be willing to bet quite a lot that most people having a negative reaction would have the same reaction whether the player was black or white.
It's really no different than the larger view that athletes aren't worth nearly the amount they are paid (market be damned). I don't think I've ever heard people say that NFL and NBA players (predominantly black leagues) are paid too much, but yet have no issue with the salaries of MLB players, NHL players, European soccer players, golfers, tennis players, etc. (sports with a lower percentage of black players). People tend to either think it's ridiculous for athletes (regardless of sport) to make the money they do, or they think it's fine. It has nothing to do with race.
February 1st, 2022 at 9:03 PM ^
You won't find too many black people complaining about players getting paid, being bought etc. Just read through various twitter threads and this applies for fans of all teams.
February 1st, 2022 at 11:55 AM ^
All I know is it's going to be highly amusing when A&M pays all this money for this roster...and still goes 9-3
February 1st, 2022 at 12:38 PM ^
5-7
Edit: Unintended consequences are often not pretty.
February 1st, 2022 at 12:21 PM ^
The NCAA aint gone do shit.
February 1st, 2022 at 2:03 PM ^
Sure they will...Texas State had better watch their back.
February 1st, 2022 at 12:21 PM ^
This is exactly what I thought would happen. The teams that are going to be successful with NIL are the ones who have donors willing to give away money.
February 1st, 2022 at 12:45 PM ^
Hunter says their artwork is being low-balled!
February 1st, 2022 at 4:32 PM ^
So we're cool with college football turning into a competition of who has the largest number of wealthy donors willing to throw cash at 17 year old kids?
February 2nd, 2022 at 9:56 AM ^
No, the laborers getting compensated in the amount of a tiny fraction of the value they create is where we draw the line.
It was totally cool when college football was a competition of who has the largest number of wealthy donors willing to throw cash at coaches, stadiums, and facilities, though. Just can't stomach the idea of giving some small cut to the people who actually do all the work.