A booster writes a $50,000 check to a nonprofit "collective" that supports the football team at their alma mater. The collective hands out 1099-NEC compensation to twenty student-athletes for autograph signings and appearances. The donor expects a charitable deduction on Schedule A. Twelve months later, the IRS revokes the collective's tax-exempt status — and the donor's accountant has to explain why a "501(c)(3)" donation produced exactly zero deduction.
This is not a hypothetical. Since the IRS Office of Chief Counsel released Memorandum AM 2023-004 in June 2023, name, image, and likeness (NIL) collectives have been on borrowed time. A wave of denial letters in late 2024 and early 2025, plus the IRS announcing tax-exempt collectives as a 2025 enforcement priority, has made one thing clear: most NIL collectives are not charities, and donors who treated them like one are about to find out.
Whether you run a collective, sit on its board, advise its donors, or have already written a check, this guide explains exactly how the private benefit doctrine works, why the IRS believes most NIL collectives flunk the operational test, and what realistic options remain for structuring NIL support without burning donors on their tax return.
What an NIL Collective Actually Does
NIL collectives appeared almost overnight after the NCAA's July 2021 policy change permitted student-athletes to monetize their name, image, and likeness. A typical collective pools money from boosters, alumni, and local businesses, then contracts with athletes at a specific school to perform paid activities — social media posts, autograph signings, charity appearances, youth camp instruction, or simple endorsement deals.
Two structural choices emerged:
- For-profit collectives are usually organized as state-law LLCs. They face no cap on how much of contributor money can flow to athletes and no restrictions on the type of NIL activity they facilitate. Contributors get no tax deduction.
- Nonprofit collectives were typically organized as state nonprofit corporations and applied for federal 501(c)(3) status. The pitch to donors was that contributions would be tax-deductible because athletes were performing "charitable" appearances at affiliated children's hospitals, military causes, or community programs.
The nonprofit structure was attractive for an obvious reason: a high-bracket donor giving $100,000 could potentially save $37,000 in federal income tax if the contribution qualified as a charitable gift under Section 170. That math, combined with state nonprofit corporation filings and quick determination letters during a backlog, produced more than 200 nonprofit collectives at one point — many of them obtaining 501(c)(3) recognition before the IRS had developed a position.
Memorandum AM 2023-004 in Plain English
On June 9, 2023, the IRS Office of Chief Counsel released AM 2023-004, a twelve-page legal memorandum addressing whether a nonprofit NIL collective qualifies as an organization "operated exclusively for one or more exempt purposes" under Section 501(c)(3). The conclusion was blunt: "in many cases, a nonprofit NIL collective will be operating for a substantial nonexempt purpose — serving the private interests of student-athletes."
The memo is non-precedential — it cannot be cited by the IRS or by taxpayers as authority in litigation — but it telegraphs how the agency's exempt organizations division will analyze applications and audits. Subsequent private letter rulings and final determination letters have followed exactly the analysis laid out in AM 2023-004.
The Operational Test
To qualify under Section 501(c)(3), an organization must pass the operational test: it must be operated exclusively for exempt purposes. "Exclusively" has been read for decades as meaning "primarily." If a substantial nonexempt purpose is present, even one strong charitable purpose will not save the exemption.
Treasury Regulation 1.501(c)(3)-1(d)(1)(ii) further requires that an organization "serve a public rather than a private interest." This is the private benefit doctrine, and it is doctrinally distinct from the related private inurement rule that targets insiders.
Two Ways Private Benefit Becomes Disqualifying
The IRS analyzes private benefit on two axes:
- Qualitative: Is the private benefit a necessary concomitant of accomplishing the exempt purpose, or is it the actual point of the activity? Compensating athletes is not a necessary side effect of, say, supporting a children's hospital — the hospital benefits whether or not the athlete is paid.
- Quantitative: How large is the private benefit relative to the public benefit? Many collectives committed in writing to pay 80 to 100 percent of net contributions to student-athletes. The memo treats anything in this range as substantial private benefit by any reasonable measure.
Put the two together and you get the IRS's core conclusion: most nonprofit NIL collectives are organized in form to support a charity, but in operation they exist to compensate a small, identifiable, non-charitable class — the rostered athletes of a single university. That fails the public-interest requirement.
Why a "Charitable Class" Matters
A 501(c)(3) must benefit a charitable class. The classic definition is a group that is either large and indefinite enough that helping any individual member produces a community benefit, or a group identified by a recognized charitable need (the poor, the elderly, the disabled).
Student-athletes on a single university's roster fail this test. They are a small, finite group, identified by their athletic talent rather than any charitable characteristic. The fact that they may perform sympathetic activities — visiting hospitalized children, signing autographs at a veterans' benefit — does not make them a charitable class. The collective is operating to benefit them, not to benefit the patients or veterans they happen to visit.
This is the same analysis the IRS applies to scholarship organizations that restrict awards too narrowly. A scholarship fund limited to the descendants of a single family is not charitable. By analogy, an organization that exists to pay only the football team at one school is not charitable either.
The 2024–2025 Enforcement Wave
After AM 2023-004 landed, the IRS moved from theory to practice. In an October 31, 2024 final determination letter (released publicly on January 24, 2025), the IRS denied 501(c)(3) status to a collective that paid student-athletes to perform charitable appearances. The determination letter applied the AM 2023-004 framework almost verbatim, holding that payments to athletes were not incidental to the charitable activity but rather outweighed it.
Multiple private letter rulings released around the same time reached identical conclusions: the activities directly provide a private benefit to student-athletes who are not a charitable class, and each organization fails the operational test.
The IRS Tax Exempt and Government Entities (TE/GE) division formally added NIL-using collectives to its 2025 compliance priorities. That means active examinations of existing exempt collectives, not just denials of new applications. For collectives that already hold a determination letter, the realistic outcomes are: prospective revocation if the IRS believes the application fully described current activities, or retroactive revocation if it did not — which can claw back deductions taken by every donor in open tax years.
By mid-2025, several major nonprofit collectives had voluntarily shut down. The BPS Foundation, which had served as a charitable conduit for collectives at roughly two dozen schools, announced it had no viable path forward. Collectives tied to Notre Dame and Alabama folded their nonprofit operations. Others quietly merged into for-profit LLCs.
What This Means for the Donor
If you wrote a check to a nonprofit NIL collective, here is the practical reality:
Determination letter status today is what matters. Search the IRS Tax Exempt Organization Search (TEOS) tool with the collective's EIN. If the organization still has a current determination letter and has not been revoked, a contribution made while the determination was in effect is generally deductible — provided the collective in fact qualifies. If the IRS later revokes prospectively, donations after the revocation date are not deductible. If revocation is retroactive, deductions you already claimed can be disallowed.
The 50 percent quid pro quo issue. Section 6115 requires the charity to provide a written disclosure for any quid pro quo contribution over $75 — meaning a payment in which the donor receives goods or services in return. Many collectives offer donor "perks" (tickets, signed merchandise, meet-and-greets) that look exactly like quid pro quo benefits. The deductible portion is only the amount over the fair market value of what the donor received. If the collective never issued a Section 6115 disclosure, the deduction is in jeopardy even if the entity is a valid 501(c)(3).
Substantiation requirements still apply. Section 170(f)(8) requires a contemporaneous written acknowledgment from the charity for any single contribution of $250 or more. The acknowledgment must state the amount, whether any goods or services were provided, and a good-faith estimate of their value. Without that acknowledgment in your records before you file, the deduction is disallowed — regardless of the charity's status.
Watch for retroactive revocation language. If a determination letter is revoked and the IRS finds the application materially misstated the collective's activities, the revocation can be retroactive to the formation date. Donors then must amend prior returns or risk an examination of their own.
Disclosure on Form 8283. Non-cash gifts over $500 (and any single item over $5,000 requiring appraisal) require Form 8283. Even for cash gifts, donors making large NIL-related contributions should retain the determination letter status documentation as of the gift date.
What This Means for the Collective
A nonprofit NIL collective today has three honest paths forward:
Reorganize as a for-profit LLC. This is the cleanest option. The LLC pays athletes through ordinary business contracts, donors get no deduction, and there is no IRS exposure. Many former 501(c)(3) collectives have done exactly this.
Restructure as a true charitable program. A few collectives have attempted to obtain or retain 501(c)(3) status by genuinely flipping the relationship: the charity exists to fund a defined public-benefit program (community youth athletics, mental health awareness, food insecurity), and athletes are hired through a separate for-profit entity that bills the charity at arm's length only for actual services rendered. The structure must withstand the operational test on its own facts — including a quantitative ceiling on athlete compensation as a share of total program spending. The collective behind the Michigan-supporting Hail! Impact, paired with a sister LLC, is one example that obtained approval after the memo. These structures are rare and require careful, ongoing compliance.
Wind down and distribute. A revoked 501(c)(3) must distribute remaining assets to another qualifying organization under its dissolution clause. Failing to do so creates an excise tax liability and personal exposure for directors. If your collective is going to fold, plan the wind-down with counsel before assets evaporate.
A few things to avoid:
- Do not promise donors a deduction in marketing materials unless you have a current, non-revoked determination letter and your operations actually qualify.
- Do not use a third-party "fiscal sponsor" 501(c)(3) to launder donations to an unqualified collective. The IRS treats the underlying purpose, not the wrapper, as controlling.
- Do not silently change the activity mix after receiving a determination letter. Material changes require Form 990 disclosure and may require a new application.
Bookkeeping Implications on Both Sides
The accounting consequences of getting NIL classification wrong are substantial — and they show up in the books long before the IRS does.
For the collective, every dollar paid to an athlete is compensation that requires 1099-NEC reporting if it crosses the threshold (currently $600 for tax year 2025 — and watch the new lower thresholds for third-party processor reporting). If the collective is reclassified as a for-profit entity, it owes corporate income tax on net earnings going back to formation, plus state unemployment, federal income tax withholding obligations on certain payments, and possibly state sales tax on merchandise. A clean general ledger that separately tracks athlete compensation, program-related expenses, fundraising, and general administration is essential — both to defend exempt status while it lasts and to support tax positions if it is revoked.
For the donor, distinguishing deductible charitable contributions from non-deductible business or entertainment expenses requires categorical clarity in your records. Plain-text accounting — where each transaction has an explicit account, date, source document, and counterparty — makes the deduction defensible if questioned. A vague "donations" lump sum is exactly the kind of entry that produces a Notice CP2000 when the recipient is later revoked.
Common Mistakes to Avoid
- Treating a state-law nonprofit corporation status as proof of 501(c)(3) status. They are independent. A state-recognized nonprofit is not federally tax-exempt until the IRS issues a determination letter.
- Assuming all "charitable" activity protects the entity. Even genuine charitable activities cannot save an organization whose primary operation is paying athletes.
- Ignoring the qualitative private benefit prong. Many collectives focused only on keeping athlete payments under some self-imposed percentage cap. The IRS analysis also asks whether the benefit is necessary to the exempt purpose at all — and concludes it is not.
- Skipping the written acknowledgment. Without it, the donor's deduction fails on its own grounds, regardless of the recipient's status.
- Failing to update the application. A determination letter is based on the activities described in Form 1023. If actual operations diverge, the IRS treats the original letter as inapplicable to current activity.
What to Watch For in the Next 18 Months
The NIL landscape continues to shift, and several open issues will affect both donors and collectives:
- Continuing PLRs and final determinations. Each release further entrenches the AM 2023-004 framework as operative IRS policy and shrinks the universe of arguably qualifying collectives.
- The House v. NCAA settlement. As universities prepare to share revenue with athletes directly starting in fiscal 2025–2026, the case for nonprofit collectives becomes harder to make — collectives increasingly look like ordinary business partners of a paying employer.
- State legislative experiments. A handful of states have attempted to shield collective payments from various tax characterizations. None of these laws bind federal income tax results.
- Possible legislative fix. Congressional interest in formally permitting some nonprofit NIL activity has surfaced periodically. Until enacted, the regulations and the IRS's interpretive position control.
Practical Steps if You Are Affected
If you donated to a nonprofit NIL collective and claimed a deduction:
- Pull your contemporaneous written acknowledgment for each contribution of $250 or more. If you do not have it, request it immediately.
- Check the collective's current status in TEOS. Print or save the page as of the gift date.
- Note any retroactive revocation. If found, consult a tax adviser about whether to amend.
- For very large gifts, consider proactive disclosure or qualified amended returns rather than waiting for examination.
If you operate or sit on the board of a nonprofit NIL collective:
- Conduct a quantitative analysis of the past three years of revenue and expenditures. Determine the percentage of net contributions paid to athletes versus genuinely independent charitable activities.
- Review whether all activities described in your Form 1023 still reflect operations.
- Consult exempt-organizations counsel about restructuring, voluntary termination, or proactive disclosure under the IRS's voluntary compliance program.
- Maintain meticulous separate books for each line of activity.
Keep Your Financial Records Audit-Ready
Whether you donate to NIL collectives, run one, or advise on the structures, the common thread is that the IRS will ask for clean books before it asks for anything else. Beancount.io provides plain-text accounting that gives you complete transparency and version control over every transaction — no black boxes, no vendor lock-in, and a full audit trail you can hand to counsel or the IRS without translation. Get started for free and see why developers, finance professionals, and tax advisers are switching to plain-text accounting for the records that matter most.