The Athletic Foundation Self-Dealing Scandal: Why the IRS Is Revoking Tax-Exempt Status

The press release looked great:

"NFL Star Launches Foundation to Give Back to Community"

The foundation's mission: Provide scholarships to underprivileged youth, fund youth sports programs, and support local charities.

The athlete felt good. His accountant felt good. His family felt good.

Then the IRS audit notice arrived three years later.

The findings:

• Foundation raised $800,000 in donations over 3 years
• Gave $120,000 to actual charitable programs (15% of donations)
• Paid the athlete $300,000 in "executive compensation"
• Paid the athlete's wife $120,000 as "program director"
• Paid the athlete's brother $80,000 as "fundraising consultant"
• Spent $180,000 on "administrative expenses" (including foundation credit card charges for athlete's personal travel, meals, and entertainment)

The IRS's determination:

The foundation is a sham. It exists primarily to funnel money to the athlete and his family while providing minimal charitable benefit.

Tax-exempt status: Revoked.

Penalties assessed:

• $450,000 in excise taxes for self-dealing
• $300,000 in back income taxes on compensation (now treated as personal income without charitable deduction)
• $150,000 in penalties
• Total: $900,000 owed

Plus the athlete's reputation is destroyed. National media runs stories about his "fake charity."

The foundation he started to "give back" cost him $900,000 and destroyed his public image.

I've seen this pattern repeat over and over: Athletes start foundations with good intentions but terrible execution. They treat the foundation like a personal bank account, hire family members at inflated salaries, and give minimal amounts to actual charity.

Then the IRS comes knocking.

Here's why athlete foundations trigger IRS audits, what self-dealing actually means, and how to run a legitimate foundation that doesn't land you in legal trouble.

Why Athletes Start Foundations

Before we get into what goes wrong, let's understand why athletes start foundations in the first place:

Reason #1: Genuine Desire to Give Back

Many athletes grew up in difficult circumstances and want to help others facing similar challenges.

The motivation is real and admirable.

The problem isn't the intention, it's the execution.

Reason #2: Tax Deductions

The pitch from advisors:

"Start a foundation. Donate money to it. Take a tax deduction. The foundation supports causes you care about. It's a win-win."

What they don't explain:

• You can't use the foundation's money for personal benefit
• You can't pay yourself excessive salaries
• The foundation must actually engage in charitable activities (not just exist on paper)
• Violating these rules results in devastating penalties

Reason #3: Public Image and Brand Building

Foundations create positive publicity:

• Press releases about charitable work
• Community engagement and goodwill
• Enhanced reputation with fans and sponsors

For athletes, this translates to:

• Better endorsement opportunities
• Stronger fan loyalty
• Positive media coverage

But if the foundation is later exposed as a sham, the reputational damage is catastrophic.

Reason #4: Family Employment

The unspoken reason many athletes start foundations:

To create jobs for family members.

• Pay mom as "executive director" ($100K/year)
• Pay brother as "community outreach coordinator" ($75K/year)
• Pay cousin as "fundraising manager" ($60K/year)

This is legal if:

• The salaries are reasonable for the work performed
• The family members actually perform substantial services
• The foundation primarily benefits charitable causes, not the family

This is illegal (self-dealing) if:

• The salaries are excessive relative to market rates
• Family members do minimal work
• The foundation primarily benefits the family, not charity

What Self-Dealing Actually Means

"Self-dealing" is IRS terminology for transactions between a 501(c)(3) foundation and "disqualified persons" that benefit the disqualified persons rather than the charitable mission.

Who Are "Disqualified Persons"?

For athlete foundations, disqualified persons include:

• The athlete (founder)
• The athlete's family members (spouse, parents, children, siblings)
• Foundation board members and officers
• Substantial contributors (donors who gave >2% of total contributions)
• Businesses owned by any of the above

Basically: Anyone with control over the foundation or a close relationship to those who do.

What Transactions Are Prohibited?

The IRS prohibits transactions between the foundation and disqualified persons that provide private benefit, including:

1. Excessive Compensation

Paying yourself or family members salaries that exceed reasonable market rates.

Example of self-dealing:

Foundation pays athlete $250,000 annually as "president" when comparable nonprofit executive positions pay $80,000-$120,000.

Excess compensation: $130,000-$170,000 (subject to excise taxes)

2. Use of Foundation Assets for Personal Benefit

Using foundation money, property, or resources for personal purposes.

Examples of self-dealing:

• Using foundation credit card for personal travel, meals, or entertainment
• Foundation pays for athlete's personal trainer (claiming it's for "youth fitness education")
• Foundation rents office space from athlete at above-market rates
• Foundation buys athlete's personal equipment or memorabilia

3. Loans to Disqualified Persons

Foundation cannot lend money to the athlete or family members.

Example of self-dealing:

Foundation lends athlete $100,000 "to be repaid later."

Even if the athlete repays it with interest, this is prohibited.

4. Sale or Exchange of Property

Foundation cannot buy property from or sell property to disqualified persons.

Example of self-dealing:

Athlete sells his car to the foundation for $50,000. Foundation uses car for "community outreach."

Even if the price is fair market value, this is prohibited.

5. Providing Goods or Services to Disqualified Persons

Foundation cannot provide services or goods to the athlete or family beyond what's available to the general public.

Example of self-dealing:

Foundation provides free tutoring to the athlete's children (not available to public).

The IRS Foundation Audit Triggers

The IRS can't audit every foundation, so they use red flags to identify high-risk organizations.

Athlete foundations hit almost every red flag.

Red Flag #1: Low Percentage of Charitable Giving

The IRS looks at:

What percentage of the foundation's revenue actually goes to charitable programs vs. administrative costs and salaries?

Red flag threshold:

If less than 65-70% of revenue goes to charitable programs, expect scrutiny.

If less than 50%, expect an audit.

Example:

Foundation raises $500,000:

• Charitable programs: $100,000 (20%)
• Salaries (athlete and family): $250,000 (50%)
• Administrative costs: $150,000 (30%)

This screams "self-dealing."

Only 20% of donations are going to charity. The rest is going to the athlete and overhead.

Red Flag #2: High Compensation for Officers/Directors

The IRS compares:

Foundation executive salaries vs. comparable nonprofit organizations of similar size and scope.

Red flag threshold:

If your foundation raises $300,000 annually and pays the executive director $200,000, that's unreasonable.

Comparable salary for $300K foundation:

$40,000-$70,000 for part-time executive director.

Paying $200,000 is 3-5x market rate, clear self-dealing.

Red Flag #3: Related-Party Transactions

The IRS looks for:

Payments to family members, businesses owned by the athlete, or other related parties.

Red flag examples:

• Foundation pays athlete's spouse $100,000 as "program director"
• Foundation rents office space from athlete's real estate company
• Foundation hires athlete's business manager as "consultant" for $80,000

These aren't automatically illegal, but they trigger audit scrutiny.

Red Flag #4: Lavish Spending on Events and Travel

The IRS examines:

Foundation expenses for galas, fundraising events, travel, meals, and entertainment.

Red flag threshold:

If fundraising events cost more than they raise, or if "charitable trips" look like luxury vacations, expect scrutiny.

Example:

Foundation hosts annual gala:

• Cost: $200,000 (venue, food, entertainment)
• Funds raised: $150,000

Net loss: $50,000

This is a red flag. Fundraising events should generate net revenue, not net losses.

Plus, if the athlete and family treat the gala as a personal party, that's additional private benefit.

Red Flag #5: Minimal Actual Charitable Activity

The IRS looks for:

Evidence that the foundation is actually conducting charitable programs, not just shuffling money around.

Red flag:

Foundation claims to "support youth sports" but:

• Doesn't operate any programs directly
• Doesn't grant funds to other organizations doing youth sports work
• Has no documented charitable activities beyond vague "awareness campaigns"

This suggests the foundation exists on paper only.

Real-World Foundation Scandals

Case 1: The $300,000 Salary Foundation

The athlete:

NFL player, started foundation in 2015 to provide scholarships and fund youth football programs.

Foundation financials (2015-2018):

• Total donations: $1.2M
• Scholarships awarded: $180,000 (15%)
• Youth programs funded: $120,000 (10%)
• Athlete's salary as president: $300,000 annually × 3 years = $900,000 (75%)

IRS audit findings (2019):

Athlete's $300,000 salary is excessive. Comparable nonprofit presidents of $400K foundations earn $60,000-$100,000.

Excess compensation: $200,000-$240,000 annually

IRS assessment:

• Excise tax on self-dealing (athlete): $200,000 × 3 years = $600,000
• Additional excise tax on foundation managers who approved compensation: $60,000
• Tax-exempt status: Revoked

Outcome:

Athlete owes $600,000 in excise taxes. Foundation loses tax-exempt status. All future donations are non-deductible. Foundation shuts down.

Total cost: $600,000 + reputational damage

What he should have done:

Paid himself $0-$75,000 as president (or been a volunteer). Directed the $900,000 in salary to actual charitable programs.

Case 2: The Family Payroll Foundation

The athlete:

NBA player, started foundation in 2016 to support education and youth basketball.

Foundation structure:

• President (athlete): $150,000/year
• Executive Director (athlete's wife): $120,000/year
• Program Director (athlete's brother): $80,000/year
• Fundraising Consultant (athlete's cousin): $60,000/year

Total family payroll: $410,000 annually

Foundation charitable giving:

• Scholarships: $80,000
• Youth basketball programs: $40,000
• Total charitable programs: $120,000

IRS audit findings (2020):

Foundation raised $600,000 over 3 years but gave only $120,000 (20%) to charity. Paid $1.23M in family salaries (205% of charitable giving).

All four family members' salaries deemed excessive for part-time roles in a small foundation.

IRS assessment:

• Excise taxes for self-dealing: $800,000
• Back income taxes (salaries reclassified as personal income without deduction): $400,000
• Penalties: $200,000
• Total: $1.4M

Outcome:

Foundation bankrupt. Athlete's reputation destroyed. National media coverage of "fake charity."

Case 3: The Personal Expense Foundation

The athlete:

MLB player, started foundation in 2017 to combat childhood hunger.

Foundation credit card expenses (2017-2019):

• $45,000: Athlete's personal travel (charged as "charitable site visits")
• $28,000: Athlete's family dinners (charged as "donor cultivation meals")
• $15,000: Athlete's gym membership and personal trainer (charged as "health and wellness program development")
• $12,000: Athlete's country club membership (charged as "networking and fundraising")

Total personal expenses disguised as charitable: $100,000

Actual charitable programs funded: $80,000

IRS audit findings (2020):

Foundation spent more on athlete's personal expenses than on fighting childhood hunger.

All personal expenses reclassified as self-dealing.

IRS assessment:

• Excise taxes: $100,000
• Back income taxes (personal expenses treated as athlete's income): $50,000
• Penalties: $30,000
• Total: $180,000

Outcome:

Tax-exempt status revoked. Foundation shut down. Athlete's "charitable work" exposed as self-serving scam.

How to Run a Legitimate Foundation (Without Going to Prison)

If you want to start a foundation that actually helps people AND doesn't land you in legal trouble, here's how:

Step 1: Start Small (Or Don't Start at All)

The reality:

Most athletes don't need their own foundation.

Alternatives that avoid all compliance risk:

Option A: Donate directly to existing charities

Find established nonprofits doing the work you care about. Donate money. Take the tax deduction. Done.

No administrative burden. No compliance risk. No IRS audits.

Option B: Create a donor-advised fund (DAF)

A DAF lets you:

• Donate money and take an immediate tax deduction
• Recommend grants to charities over time
• Avoid all the compliance and administrative burden of running a foundation

Cost: $0 setup, minimal annual fees

Example:

Athlete donates $500,000 to a DAF at Fidelity Charitable.

• Immediate tax deduction: $500,000
• Athlete recommends $50,000 grants annually to youth sports programs
• Zero foundation administration, zero compliance risk

Option C: Partner with an existing foundation

Instead of starting your own, partner with an established foundation working in your area of interest.

Example: Fund a scholarship program through an existing education foundation. Your name is attached, but they handle all administration and compliance.

Step 2: If You Start a Foundation, Don't Pay Yourself

The safest approach:

Be a volunteer. Take $0 salary.

Why this works:

• Eliminates all self-dealing risk related to compensation
• Demonstrates genuine charitable intent
• Avoids IRS scrutiny on reasonable compensation

If you must be paid:

Hire an independent compensation consultant to determine fair market salary for your role. Pay yourself that amount or less.

Never pay yourself based on what you "think" is fair.

Step 3: Hire Professional Staff (Not Just Family)

The problem with family-only foundations:

They look like job creation programs for relatives, not charities.

Better approach:

• Hire a professional nonprofit executive director (non-family)
• Pay market-rate salary ($60K-$120K depending on foundation size)
• If family members work for the foundation, ensure:
• They have actual qualifications for the role
• They're paid market-rate salaries (not inflated)
• They perform substantial, documented services

Step 4: Establish an Independent Board

IRS requirement:

501(c)(3) foundations must have a board of directors that exercises independent oversight.

What "independent" means:

Board members who are not:

• The athlete
• The athlete's family
• The athlete's employees or business partners

Minimum standard:

At least 3-5 independent board members who:

• Understand nonprofit governance
• Review and approve foundation budgets
• Approve salaries and related-party transactions
• Ensure the foundation is fulfilling its charitable mission

Why this matters:

Independent board members provide a check against self-dealing. If the athlete proposes paying himself $200,000, independent board members will say "that's excessive."

Step 5: Actually Do Charitable Work

This seems obvious, but many foundations fail here.

Your foundation must engage in substantial charitable activities, such as:

• Operating charitable programs directly (e.g., running a youth sports camp)
• Making grants to other charitable organizations
• Providing scholarships
• Funding specific charitable projects

It's not enough to:

• Host one fundraising gala per year
• "Raise awareness" without tangible programs
• Claim vague "community impact"

The IRS wants to see measurable charitable output.

Step 6: Meet the 5% Distribution Requirement

IRS rule for private foundations:

You must distribute at least 5% of your foundation's assets annually for charitable purposes.

What this means:

If your foundation has $1M in assets, you must spend at least $50,000 on charitable programs each year.

Failure to meet the 5% requirement:

Results in excise taxes on the shortfall.

Step 7: Keep Impeccable Records

The IRS will ask for documentation of:

• All charitable programs (descriptions, beneficiaries, outcomes)
• All expenses (receipts, invoices, purpose)
• All grants made (to whom, for what purpose, how verified)
• All salaries (job descriptions, work performed, market rate justification)
• All board meetings (minutes, decisions, votes)

If you can't document it, the IRS will disallow it.

Step 8: File Accurate Tax Returns (Form 990)

All 501(c)(3) foundations must file Form 990 annually.

This form discloses:

• All revenue and expenses
• Salaries of officers and key employees
• Grants made
• Related-party transactions

Form 990 is PUBLIC.

Anyone can view it online at sites like Guide-star  or the IRS.

This means:

• Media can see if you're paying yourself $300,000
• Donors can see if only 15% goes to charity
• Competitors can see your foundation's finances

Make sure your Form 990 shows a foundation that's actually charitable.

Step 9: Avoid Personal Use of Foundation Resources

Never:

• Use foundation credit card for personal expenses
• Charge personal travel as "charitable site visits"
• Have foundation pay for personal trainers, gym memberships, or family expenses
• Use foundation property (cars, equipment) for personal purposes

If you need to use foundation resources, document it and reimburse the foundation at fair market rates.

Step 10: Work with Experts

Don't DIY your foundation.

Hire:

• A nonprofit attorney to set up the structure properly
• A CPA experienced in nonprofit tax compliance to prepare Form 990
• A nonprofit consultant to advise on governance and programs

Cost:

$10,000-$30,000 in setup and annual compliance costs.

Value:

Avoiding $500,000-$1,000,000 in IRS penalties and reputational destruction.

The Tax Benefits (If Done Right)

If you run a legitimate foundation, there ARE real tax benefits:

Benefit #1: Immediate Deduction for Large Donations

When you donate to your foundation, you get an immediate tax deduction (up to IRS limits).

Limits:

• Cash donations: Deductible up to 60% of adjusted gross income (AGI)
• Appreciated assets (stock, real estate): Deductible up to 30% of AGI

Example:

Athlete earns $5M, donates $2M to foundation.

• Tax deduction: $2M
• Tax savings (at 50% rate): $1M

The foundation now has $2M to deploy for charitable purposes over time.

Benefit #2: Avoid Capital Gains on Appreciated Assets

If you donate appreciated stock or property to your foundation, you avoid capital gains taxes.

Example:

You bought stock for $100,000, now worth $1M.

If you sell and donate cash:

• Capital gains tax: $900,000 × 20% = $180,000
• Net donation: $820,000

If you donate stock directly:

• Capital gains tax: $0
• Full $1M goes to foundation

Tax savings: $180,000

Benefit #3: Multi-Year Tax Planning

You can make a large donation in a high-income year and take the deduction, then the foundation distributes funds over multiple years.

Example:

Athlete signs $30M contract with $15M signing bonus in Year 1.

Donates $5M to foundation in Year 1:

• Immediate $5M tax deduction (offsets high-income year)
• Foundation distributes $500K-$1M annually for charitable programs over 10 years

The Bottom Line

Athletic foundations can be powerful tools for giving back if run properly.

But most athlete foundations fail because:

• Athletes pay themselves excessive salaries 
• Foundations become family payroll operations 
• Minimal actual charitable work happens 
• Foundation resources are used for personal benefit 
• No independent oversight

The IRS knows these patterns and aggressively audits athlete foundations.

When caught, the penalties are devastating:

• $500,000-$1,000,000+ in excise taxes
• Loss of tax-exempt status
• Reputational destruction
• National media coverage of "fake charity"

The alternative:

✅ Donate to existing charities (zero compliance risk) ✅ Create a donor-advised fund (simple, effective, no administration) ✅ If you start a foundation:

• Pay yourself $0 or market-rate salary only
• Hire professional staff and independent board
• Spend 65-75%+ of revenue on actual charitable programs
• Keep impeccable records
• Work with nonprofit experts

Starting a foundation to "give back" is admirable.

Starting a foundation to employ your family and pay yourself $300,000 while giving 15% to charity is a tax fraud waiting to be exposed.

Do it right, or don't do it at all.

At Courtside Wealth Partners and Courtside CPA & Associates, we help athletes evaluate whether starting a foundation makes sense or whether donor-advised funds and direct charitable giving are smarter alternatives. For athletes who do start foundations, we connect them with nonprofit attorneys and CPAs to ensure proper structure and compliance.

Thinking about starting a foundation? Let's talk about the right approach: [CONTACT US]