This article will examine the rise of Name, Image, and Likeness (NIL) collectives, funded by college sport boosters and structured as tax-excempt entities under §501(c)(3) of the Internal Revenue Code. The organizations claimed to have been formed to serve public interests purposes through community engagement, educational events, and economic development. In practice many of these foundations acted as pass-through entities, delivering tax deductions to the donors directly through their donations. Based on recent IRS enforcement actions including GLAM 2023-004 and several Private Letter Rulings (PLR’s) this article argues that most NIL collectives formed like §501(c)(3)  organizations violate the operational and private benefit tests under the Treasury Regulations. It further explores the doctrinal, financial and policy risks to donors, athletes, and the broader nonprofit sector. This Article concludes by recommending structural reforms, enhanced oversight and creation of a categorical bar on §501(c)(3)  status for NIL based collectives moving forward. 

The landscape of college sports has transformed rapidly following the Supreme Court’s decision in NCAA v Alston, 141 S. Ct 2141 (2021) which loosened antitrust restrictions on athletes compensation. Almost overnight NIL compensation took over collegiate recruiting and guidance and regulation became known as the “wild west” allowing schools individually to regulate the commerce and protect its athletes as it saw fit. Amid this shift, a new phenomenon emerged known as “NIL Collectives”- organizations often formed and funded through alumni, boosters, and fans to pool resources together and compensate athletes hoping to help land and retain top talent at one’s school. While many of these funds operate as a for-profit LLC, a growing number have sought recognition as tax-exempt charities under §501(c)(3) . These nonprofit NIL collectives claim to fund athletes in exchange for charitable appearances, or community service. However, in practice most function as nominal charities that primarily serve private interests; donors obtain tax deductions, athletes receive direct financial compensation, and universities gain a competitive edge in recruiting. Everybody wins right? WRONG. The IRS has taken notice. In 2023 the IRS issued GLAM 2023-004 and multiple PLR’s denying tax exempt status to NIL collectives for failing the operational and private benefit tests. This article contends NIL collectives structured as §501(c)(3)   charities are incompatible with the core principles of nonprofit law, and their primary purpose is not public benefit but private compensation, that if left unchecked risks the credibility of the charitable tax regime moving forward. 

In order to qualify under 501(c)(3), an organization must be organized and operated exclusively for exempt purposes which includes: charitable, educational, or scientific missions: See Treas. Reg §1.501(c)(3)-1(a)(1). The Internal Revenue Service enforces this requirement through two doctrinal tools: the organizational test and the operational test. The organizational test assesses whether the entity’s founding documents; including its articles of incorporation and bylaws, limit its purpose to one or more exempt functions and do not authorize activities inconsistent with those purposes. These tests ensure the organization is dedicated to charitable or organizational missions. For example a nonprofit for the purpose of providing education for underserved youth would satisfy the tests as long as the language in said bylaws does not include permitting activities such as profit sharing or private enrichment to its founders. In contrast, if these bylaws and articles of incorporation are vague or specifically permit commercial activities the organization would likely fail the organizational test as well. 

The operational test by contrast examines how the organization functions in practice. It requires that the entity engage primarily in activities that further the exempt purpose of the charity and no more than an insubstantial part of its activities further a non-exempt purpose. Even 1 insubstantial non-excempt activity can be fatal. See Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279, 283 (1945) (holding that a substantial non-exempt purpose, such as providing economic benefit to members—disqualifies an organization from §501(c)(3) status, even if it also engages in educational activities). Opposingly, a museum that charges admission but uses the revenue to preserve and display art for the public, furthers an exempt purpose and would be allowed. 

Treasury Regulation §1.501(c)(3)-1(d)(1)(ii) further mandates that an organization must serve a public, not private, interest, commonly known as the private benefit doctrine. The IRS applies a 2 part test to assess whether any private benefit is permissible (1) is the private benefit qualitatively incidental to the exempt purpose; and (2) is it quantitatively insubstantial when compared to the public benefit? See Bob Jones Univ. v. United States, 461 U.S. 574 (1983), a landmark case in which the Supreme Court upheld the IRS’s revocation of tax-exempt status from a private religious university because its racially discriminatory admissions policies violated fundamental public policy.  In that case, Bob Jones University argued that it met the requirement of §501(c)(3) by operating for religious and educational purposes. However, the Court found that compliance with fundamental public policy is an inherent requirement of tax-exempt status under §501(c)(3), even if not explicitly stated in the statute. Because the university’s racially discriminatory practices infringed national public policy against racial discrimination in education. This case clarified that even if an organization’s activities appear to satisfy the charitable or educational element on their face, substantial violation of public policy or private benefit will void its exemption. These cases set a precedent for denying or revoking exempt status where an organization’s operations substantially undermine societal values and national public policy. 

While most nonprofit NIL collectives follow a similar structure of being formed as §501(c)(3)  public charities, funded by tax deductible donations from boosters and provide compensation to athletes for charitable appearances or efforts to the community. In practice “around 80%” of funds go directly to athletes with minimal structured programming or community impact; and athlete selection is typically driven through athletic performance or perceived recruitment value to land top athletes. These practices underscore the true function of the charities and rather benefit private parties, businesses, and individuals as opposed to the general public. Notably organizations such as “The Foundation” (University of Florida) and “Horns with Heart” (University of Texas) publicly describe athlete payments as part of their charity missions within their bylaws. However these arrangements raise serious questions of compliance with the operational and private benefit tests. In one high profile example Texas A&M’s Universities 12th Man Foundation announces in early 2024 that it would shut down its NIL related charitable program due to fears that continuing the collective would jeopardize its overall§501(c)(3)  status. The voluntary termination underscores the real legal risk and reputational exposure these collectives face.

The IRS’s position is clearly outlined in GLAM 2023-004, which states: “An organization that develops paid NIL opportunities for student-athletes will, in many cases, be operating for a substantial nonexempt purpose, serving the private interests of student-athletes, which is more than incidental to any exempt purpose furthered by the activity.” The memorandum highlights that when “collectives pay anywhere in the 80 to 100 percent range,” the benefit to athletes is substantial rather than incidental. It also concludes that student-athletes do not constitute a charitable class unless they are selected based on financial need. Although not established through binding law, numerous IRS Private Letter Rulings have consistently applied the principle that when an organization distributes the majority of its funds without furthering a charitable purpose, and when the private benefit is intentional rather than incidental, it fails to meet the requirements of section 501(c)(3). This reflects a clear doctrinal trend: NIL collectives that organize compensation for athletes, even when labeled as charitable, do not satisfy the legal standards for tax-exempt status.

The consequences of breaking the rules are serious. For the organizations, losing tax-exempt status is a major setback. It can lead to excise taxes under IRC 4958 and trigger investigations by state attorneys general. Donors may have their tax deductions denied under IRC 170 and face penalties if they overvalue their contributions. Athletes could also be affected, facing IRS audits, back taxes, NCAA investigations, and disruptions to their education or athletic seasons. To restore integrity to the nonprofit sector, this Article proposes several reforms.

1. The IRS should issue clear guidance banning NIL collectives from using §501(c)(3) status
   1. To eliminate confusion the IRS should publish an official ruling that makes it clear NIL collectives cannot qualify as charities under §501(c)(3). This would stop groups from claiming tax exempt status while primarily paying athletes which serves private not public interests.
2. Congress should give the IRS more resources to enforce nonprofit rules
   1. The IRS division that monitors nonprofits, including NIL collectives often lacks the staff and funding to catch abuse. More funding would allow the IRS to review tax exempt applications, audit, questionable collectives and make sure the current law is followed.
3. Nonprofits should be required to disclose athlete payments on Form 990.
   1. Tax exempt organizations already must file Form 990 with the IRS, but the current rules don’t require them to list how much money goes to athletes; it simply shows the salaries paid to “Officers, Directors, Trustees, and Key employees. Requiring this information makes the system of these charities more transparent allowing regulators to assess the public vs private benefits conferred and help prevent abuse to the tax-excempt system.