Imagine you write a $5,000 check to a nonprofit named after your favorite college team. The website calls it a charity. It has a 501(c)(3) determination letter. It promises your money will "support student-athletes and the community." So you plan to deduct the full $5,000 on next year's tax return.
Then your accountant tells you the deduction is worthless—and that the organization may not be a charity at all.
Welcome to the strange tax world of name, image, and likeness (NIL) collectives. Hundreds of these organizations sprang up after college athletes won the right to be paid, and a large share of them launched as tax-exempt charities. In June 2023, the IRS Office of Chief Counsel released a memorandum that effectively pulled the rug out from under that model. If you donate to a collective, run one, or advise people who do, this is the guidance you need to understand.
How NIL Collectives Became "Charities"
Until 2021, college athletes could not be paid for the use of their name, image, or likeness. After a Supreme Court ruling and a wave of state laws changed that, fans and boosters needed a vehicle to pool money and route it to athletes. The NIL collective was born.
A collective is an organization—usually separate from the university—that raises money from supporters and pays athletes for NIL activities: autograph signings, social media posts, appearances, and increasingly, charitable cameos. Some collectives organized as for-profit LLCs. But a meaningful number set themselves up as 501(c)(3) public charities.
The appeal was obvious. If the collective is a charity, every booster donation becomes tax-deductible. A donor in the 37% federal bracket effectively gets the government to subsidize more than a third of the gift. That is a powerful fundraising pitch, and many collectives leaned on it hard.
To make the charity story work, these collectives paired athlete payments with genuine nonprofit activity. The athlete would record a video for a children's hospital, visit a food bank, or promote a literacy program—and get paid by the collective for doing it. The pitch to the IRS was that the collective furthered charitable purposes and simply compensated athletes as part of that work.
The IRS did not buy it.
What the IRS Actually Said in AM 2023-004
On June 9, 2023, the IRS Office of Chief Counsel released a 12-page legal memorandum, AM 2023-004. It is not a regulation and it does not bind courts, but it tells the public exactly how the IRS will analyze these organizations—and it is blunt. The headline conclusion: many NIL collectives are not operated exclusively for exempt purposes, because they exist primarily to benefit the private interests of student-athletes.
Here is the reasoning, step by step.
The Operational Test
To qualify under Section 501(c)(3), an organization must be both organized and operated exclusively for exempt purposes—charitable, educational, religious, scientific, and so on. The "operated" half is the operational test, and it asks a simple question: what does the organization actually spend its time and money doing?
An organization passes only if it engages primarily in activities that accomplish exempt purposes. It must serve a public interest rather than a private one. A collective can have a beautiful mission statement, but if the day-to-day reality is cutting checks to athletes, the operational test looks at the checks.
The Private Benefit Doctrine: Incidental vs. Substantial
Every charity confers some private benefit. A scholarship benefits the student who receives it. A food bank benefits the families it feeds. The law tolerates this as long as the private benefit is incidental to the public benefit. The IRS memorandum spells out a two-part test that a private benefit must satisfy to count as incidental:
- Qualitatively incidental — the private benefit is a byproduct of, or a necessary concomitant to, the exempt activity. You cannot run a scholarship program without a student getting money.
- Quantitatively incidental — the private benefit is insubstantial in amount compared to the overall public benefit.
A benefit must clear both hurdles. NIL collectives stumble badly on the second one.
The memorandum points to a damning fact about how collectives advertise themselves: many promise to pay out 80%, or even 100%, of all contributions directly to student-athletes. The IRS's verdict on that range was unsparing—the benefit to private interests is "substantial by any measure and cannot be dismissed as merely incidental."
Think about what that means arithmetically. If 80 to 100 cents of every dollar reaches an athlete's pocket, the "charitable" portion is whatever scraps remain after expenses. The private benefit is not a byproduct of the charity. The private benefit is the organization.
Why "It Funds Charity Work" Doesn't Save the Collective
Collectives anticipated this and argued two things. First, that paying athletes furthers education, because the athletes are students and college sports support the educational mission. Second, that having athletes perform charitable acts—hospital visits, fundraising appearances—makes the payments charitable.
The IRS rejected both.
Paying a student is not the same as advancing education. A university advances education; writing a check to someone who happens to be enrolled does not. And the collective's payments are, in substance, compensation for NIL rights—a commercial transaction—not an educational grant.
The charitable-cameo argument fares no better. Even if an athlete genuinely helps a food bank, the collective is still directing its resources to a narrow, non-charitable class: student-athletes at one particular school, typically chosen by boosters who want that school to win. The IRS noted that collectives are generally organized by and for boosters of a specific program. That is fan loyalty, not charity. The food bank may benefit, but the food bank is not who the money is for.
The One Narrow Exception: Genuine Need
The memorandum leaves a single door open. If a collective selects athletes for payment based on financial need—so its activity genuinely qualifies as relief of the poor and distressed—and the payments are reasonably calculated to meet that need, the payments would not serve impermissible private interests.
This is a real exception, but it is a tiny one. A collective built to relieve documented financial hardship among athletes, with need-based selection criteria and payments sized to actual need, could plausibly qualify. A collective that pays the starting quarterback six figures because boosters want a winning season cannot. The need exception describes a charity that happens to help athletes—not a recruiting tool wearing a charity's clothing.
The IRS Has Kept Pressing
AM 2023-004 was the opening move, not the final word. In the years since, the IRS has reinforced it through private letter rulings denying or scrutinizing exempt status for NIL organizations, and at least one collective that applied for recognition was formally denied. The Taxpayer Advocate Service and mainstream tax press now describe the non-deductibility of typical NIL contributions as settled expectation rather than open question. Collectives that obtained determination letters early, before the IRS articulated its position, are not safe—a determination letter can be revoked when the facts show the organization fails the operational test.
What This Means for Donors
If you are writing checks to a collective, three practical consequences follow.
Your "donation" may not be deductible. If the collective is not a legitimate 501(c)(3)—or if it holds a determination letter that does not reflect how it actually operates—your contribution does not produce a charitable deduction. Treat any deduction as fragile until you have verified the organization's status.
A contribution to a non-charity may be a gift. When money moves to an organization that funnels it to individuals, the tax system often treats the transfer as a personal gift rather than a charitable contribution. Large gifts can implicate the federal gift tax and the annual exclusion. This is a very different tax analysis from a deductible donation, and it is easy to get wrong.
Substantiation rules still apply—and they protect you. For any charitable gift of $250 or more, you need a contemporaneous written acknowledgment from the organization stating the amount and whether you received anything in return. If you got something of value back—tickets, merchandise, event access—the deductible amount is reduced by that value, and "quid pro quo" disclosure rules require the organization to tell you so. If a collective cannot produce a clean acknowledgment, that silence is itself a warning sign.
The safe alternative for fans who want a deduction has not changed: give directly to the university or its athletic foundation, which are genuine tax-exempt entities. A gift to the school is deductible. A gift to the collective generally is not.
What This Means for Collective Operators
If you run or advise a collective organized as a 501(c)(3), the memorandum is a roadmap of your exposure.
- Re-examine your payout promises. Marketing that brags about routing 80–100% of donations to athletes is, in the IRS's own words, evidence of substantial private benefit. That language is a liability.
- Expect your determination letter to be tested. Holding a letter is not a shield if your operations fail the operational test. The IRS can examine and revoke.
- Consider restructuring. Many collectives have moved to for-profit LLC structures, which are honest about what the organization does and avoid making donors a false deductibility promise. Others have wound down their charitable arm entirely.
- If you keep the charity, mean it. A genuine need-based program—documented financial-hardship criteria, payments sized to need, real charitable programming as the primary activity—is the only configuration the memorandum endorses. That is a fundamentally different organization from a booster-funded pay-for-play vehicle.
- Mind the disclosure rules. If you accept contributions over $75 in a quid pro quo arrangement, or any gift of $250 or more, you owe donors accurate written acknowledgments. Misstating deductibility can expose the organization and its managers to penalties.
Whichever structure you choose, the bookkeeping has to be airtight. A collective handles donor funds, athlete payments, withholding and 1099 reporting, and charitable program expenses—often all in the same year. Tracking those streams in separate, clearly labeled accounts is what lets you prove, if the IRS asks, exactly how much went to charitable activity versus athlete compensation. That ratio is the whole ballgame.
The House v. NCAA Settlement Changes the Math
One more development reshapes this entire landscape. In June 2025, a federal court approved the House v. NCAA settlement, which for the first time lets schools pay athletes directly, through a revenue-sharing pool capped at roughly $20.5 million per school in 2025–26 and rising over a ten-year window.
Direct school payments reduce the reason a collective needs to exist as a money-routing intermediary—and they certainly do not make the routing look more charitable. Collectives are not disappearing, but they now operate alongside school revenue sharing under heavier scrutiny, with regulators watching for arrangements that function as recruiting inducements. For donors, the cleaner deductible path—giving to the school—has only become more clearly the right one. For the tax analysis of a collective, the settlement is one more reason to assume contributions are not charitable unless proven otherwise.
A Practical Checklist Before You Donate
Before you treat any payment to a collective as a deductible charitable gift:
- Verify exempt status. Confirm the organization is listed in the IRS Tax Exempt Organization Search. A name and a logo are not proof.
- Read the payout pitch critically. If marketing emphasizes how much money reaches athletes, that is the IRS's exact evidence of substantial private benefit.
- Ask how athletes are selected. Need-based selection is the only model the IRS blesses. Performance- or roster-based selection is not charitable.
- Demand a written acknowledgment. Any gift of $250 or more needs a contemporaneous letter stating the amount and any benefits received.
- Talk to a tax professional before a large gift. A contribution that turns out to be a gift rather than a donation can carry gift-tax consequences you did not plan for.
- When in doubt, give to the school. A direct gift to the university or its athletic foundation is deductible. A gift to the collective generally is not.
Keep Your Finances Organized from Day One
Whether you operate a collective, advise its donors, or simply want to track your own charitable giving accurately, the lesson is the same: the tax treatment of money depends entirely on where it goes and why—and you can only prove that with clean records. Beancount.io offers plain-text accounting that gives you complete transparency and a full audit trail over every dollar, with no black boxes and no vendor lock-in. Get started for free and see why developers, finance professionals, and nonprofit operators are switching to plain-text accounting.