Sharing the Ball: Where Athlete Philanthropy Has Succeeded or Sailed Out of Bounds

29 July 2020 Legal News: Sports & Entertainment Publication
Authors: Jason J. Kohout

For high-profile athletes commanding mega salaries and worldwide fame, giving back generously to their communities or to a cherished cause is a go-to play.  Charitable giving carries limited risk while offering significant tax benefits, generating favorable press and goodwill for the athlete (helping to build his or her identity), and providing the individual a source of fulfilment off the field.  Teams and agents readily encourage athletes to partake in philanthropy—the visibility and presence of athletes assisting the community helps to re-engage their supporters.

Charitable Foundations

A common approach to philanthropy in the sports world is the individual foundation.  Stars from the major North American sports leagues and beyond have set up individual charities to support causes from Australian bushfire relief efforts to children’s martial arts.  This personal approach has its advantages; through foundations, players can hold events, solicit donations, and publicize their efforts on a broad scale.  Today, well-known athletes have put their famous name to burgeoning charitable foundations, such as the LeBron James Family Foundation, the Brees Dream Foundation, the Michael Phelps Foundation, and many more.

Foundations can be organized as various forms of legal entities.  A central feature of these organizations is their ability to enjoy tax-exempt status.  Section 501(c)(3) of the U.S. Internal Revenue Code exempts certain nonprofit entities from taxation.  501(c)(3) tax-exempt foundations must operate for a charitable, educational, scientific, or religious purpose, refrain from self-dealing, and avoid making political and certain lobbying expenditures, among other requirements.  To ensure compliance with these provisions and to carry out the purpose of the foundation, the organization’s directors assume certain duties to the foundation, including to accept contributions, supervise management of foundation assets, make distributions, and make available the organization for public inspection.  Foundations which fail to comply with any requirements or which engage in certain prohibited activities face steep excise taxes or possible revocation of their tax-exempt status, while individuals who engage in self-dealing transactions and directors who approve these transactions are subject to excise taxes and/or penalties.  As such, it is crucial that accountable, competent officers operate the foundation with an eye to its legal responsibilities.

The Biggest Givers in Sports Today

In this golden age of athlete marketing, philanthropy in sports is at an all-time high.  The charitable donation by LeBron James’ foundation have been widely reported – including $2.5 million distributions to both the Boys and Girls Club of America and the Smithsonian National Museum of African-American History and Culture. Yet, athlete philanthropy extends well beyond the four-time MVP award-winning benefactor of the celebrated I Promise School.  

The foundation of star Houston Texans defensive end J.J. Watt raised more than $41 million for Hurricane Harvey relief efforts, a figure spectacularly exceeding the initial $200,000 goal.  The Serena Williams Fund, founded by the tennis star, has built a number of schools in underprivileged areas of the world, including the Serena Williams Secondary School in eastern Kenya.  In addition, Cleveland Cavaliers all-star forward Kevin Love, who has been open about his own struggles with panic attacks, anxiety, and depression, established the Kevin Love Fund in 2018 with a goal to provide mental health tools to more than one billion people in its first five years.

More recently, in light of the ongoing national reckoning with racial injustice, the sports world has rallied to support the fight against discrimination.  Michael Jordan and his Jordan Brand will jointly donate $100 million to organizations combatting racism.  The social justice group the Players Coalition, founded by New Orleans Saints safety Malcolm Jenkins and former NFL wide receiver Anquan Boldin, recently struck a deal with the NFL to pledge $250 million to racial justice programs over a ten-year period.  The Know Your Rights Camp, a group started by Colin Kaepernick (who has previously donated millions towards social justice causes), is donating $1.75 million to aid minority communities and assist with the legal defenses for those arrested protesting the killings of George Floyd and others.  Countless others in sports have endeavored to raise awareness and funds during this national moment.  Repeatedly through history, the sports world has shown itself more than willing to step up and deliver for its communities.

Where Athlete Charities Have Missed the Mark

For all of the remarkable successes of athlete philanthropy, the sports world has not always produced the most effectual charitable efforts.  A bombshell 2013 report from ESPN’s “Outside the Lines” found that 74 percent of the athlete-founded charities it investigated “fell short of one or more acceptable nonprofit operating standards.”  Many of these charities spent paltry amounts on actual charitable programs (e.g., spent disproportionately high sums on salaries), with only about one-third of charities having total assets of $500,000 or more, while others were simply left idle for years.  Still other charities engaged in unethical, if not outright illegal, practices, such as “expensing a weeklong stay at a five-star resort” for an athlete to headline “a one-hour seminar at a children's camp” or the misuse of hundreds of thousands in contributions—the latter landing former NBA player Kermit Washington a six-year prison sentence in 2018.

These problems arise for several reasons.  Though frequently encouraged by teams and agents to open foundations, athletes often receive little if any guidance on running the organization—something for which they likely have no experience and limited time.  Often, athletes leave the operation of their foundations to friends and relatives, who typically do not have “the necessary dedication or experience to raise money and spend it wisely.”  In other, more nefarious circumstances, the charity is used as a vehicle to skirt taxes or commit fraud.  

The consequences for even simple neglect of the charity can be costly.  Former MLB star Alex Rodriguez’s twin foundations did not file a tax return for seven years, which resulted in the IRS revoking its tax-exempt status.  Furthermore, former Chicago Bear Chris Zorich was ordered to pay back almost $350,000 in unused funds that were left unaccounted for within his foundation.  In other cases, charities were shuttered when they became too burdensome to operate. Naturally, such disconcerting episodes can destroy an athlete’s reputation, especially when they occur in the context of purported charitable activity. Given these risks, careful management of an athlete’s charitable organization is critical, as is consideration of potential alternatives for personal charity. 

Conclusion: How Best for Athlete Charities to Proceed

Given the work and oversight required to run a foundation, some athletes may look elsewhere to direct their philanthropic efforts.  For example, despite the difficulties with his own private foundations, Alex Rodriguez has donated millions of dollars directly to a number of reputable nonprofit organizations.  Many other athletes have made similar, direct contributions to charities.  In the past, players like former Pittsburgh Steeler Hines Ward have arranged to use their team’s existing community foundation to direct funding to a cause of choice.  Moreover, athletes may consider using a donor-advised fund, which is an account administered by a third-party sponsor, such as a community foundation, that assumes for the donor the burdens of daily operations.

For those who still wish to have a foundation in their name, there are tangible solutions available to ensure the foundation’s health and legal compliance.  The individual can establish bylaws that provide for the election of future directors who share his or her vision, thus preserving the foundation’s original purpose.  The foundation can also hire a professional staff, which can better evaluate how to spend its funds, provide managerial expertise, and has close ties to the local community – thus boosting the foundation’s profile.  Moreover, creating a specific mission statement, with guidance such as the desired type(s) of grantees, the future goals of the organization, the geographic focus of its efforts, and the organization’s philosophy toward giving, can help to provide practical direction to decision-makers.  An athlete’s foundation – like any organization – will fail if not properly formed and managed; with professional teams in place and proper structural supports to guide the operation of their foundations, athletes can enjoy just as much success off the field as they do on it.

Foley summer associate Graham MacEwan was a contributing author to this article. 

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