Fiscal Sponsorship

Fiscal sponsorship is an arrangement under which a charitable organization receives contributions and grants on behalf of a project that is not itself tax-exempt, or of another charity, and administers the money for the charitable purpose the project pursues. The Internal Revenue Service's own continuing education text for exempt organizations specialists defines it in those terms: "For purposes of this article, fiscal sponsorship occurs when one or more charities choose to financially support another charity or nonexempt project." That document is training material written for the agency's own agents rather than a ruling, and it is the clearest statement of the term from the agency itself. The practical appeal is straightforward: a project can start work and accept deductible gifts without spending a year and a fee obtaining its own determination letter.

The line the arrangement lives or dies on is discretion and control. The same IRS text says plainly that "There is nothing inherently wrong with fiscal sponsorship; it is what nonoperating public and private charities do. However, it can and has been misused. Take for example a donor who attempts to do indirectly what he or she cannot do directly. Such a situation arises when the donor uses a community foundation as a conduit to accomplish an otherwise prohibited transfer of money or property."

The text then illustrates both sides with worked examples, and the wording is worth reading closely because it is the test. On the legitimate side, a community foundation approves a grant application from an individual running a tutoring program, establishes a fund and solicits contributions for it, and a private foundation gives to that fund on terms where the recipient charity is given "full control over the investment decisions concerning the grant and full discretion in determining how much and when distributions from the fund will be made." The text notes the consequence for the granting foundation: it "is relieved of exercising expenditure responsibility because it gave X full control over the grant's income and corpus."

On the failing side, a philanthropist who wants to give money to a poor individual, knowing a direct transfer is not deductible, instead gives it to a community foundation "with instructions to distribute it to Z. Y has no discretion as to the distribution of the funds. Here, Y is nothing more than a conduit. X is not entitled to a deduction." The same reasoning is applied to a private foundation that hands money to a community foundation while keeping continuing control over a project, and to a donor who runs a large gift through a community foundation to disguise its source and protect a struggling charity's public support percentage.

Why the deduction turns on this rather than on the sponsor's status. Internal Revenue Code section 170(c) allows a deduction for "a contribution or gift to or for the use of" a qualifying organization. If the sponsor must pass the money to a person or entity the donor named, the sponsor is not the recipient of anything; it is a pipe. The IRS text is explicit that it will look past the intermediary's own charitable status where that is what is happening, and it points at a long-standing line of authority for the proposition that a charity distributing funds to a non-exempt recipient must retain discretion and control over their use.

Earmarking is not the villain, and this is where most summaries overreach. The same passage says that "Earmarking is generally not a problem when there are only two players involved and the gift is not earmarked for an individual or other non-charitable purpose. Donors and grantors are free to earmark contributions to a community foundation for a specific project or program of that community foundation. ... Similarly, donors are free to earmark contributions to programs operated by third-party organizations but supervised by community foundations. Inherent in all of these situations is the control that community foundations exercise over projects and programs." So a donor may say what the money is for. What a donor may not do is decide who ultimately gets it in a way that leaves the charity with no say.

The six situations the text names as the common failures are worth knowing because they describe most of the ways this goes wrong: contributions intended for individuals, which lack public benefit; for fledgling charities without a determination letter; for non-charities operating charitable projects; for foreign charities; for private foundations funded by private foundations, since a private non-operating foundation may not grant to another; and for charities struggling to meet the public support test, where running a large gift through a publicly supported intermediary is an attempt to avoid the limit on how much of one donor's money counts.

What a sponsored project should expect from the agreement. Three things follow from the sponsor's legal ownership, and none of them is optional. The money is the sponsor's, so the project cannot direct it; it requests, and the sponsor approves or does not. The sponsor charges for administration, and the charge is a term of the written agreement rather than a market convention worth guessing at. And the agreement has to say what happens if the relationship ends or the project obtains its own exemption, because unspent funds belong to the sponsor and can only move to another charitable purpose the sponsor approves. A project treating a sponsorship as a bank account with an unusual signatory has misread the arrangement, and the misreading is usually discovered at the exit.

Fiscal sponsorship and fiscal agency are not the same thing, though the words get swapped. An agent acts on behalf of a principal and takes the principal's direction. A sponsor holds discretion over the funds and answers for their charitable use, which is precisely what makes the donor's gift deductible. A document titled "fiscal agency agreement" that in substance gives the project direction over the money describes the conduit arrangement the IRS text warns about, whatever it is called.

1. A project without its own exemption approaches a charity whose charitable purposes cover what the project does.

2. The charity reviews and approves the project, and this step is the one that matters. A sponsor that approves nothing has retained nothing.

3. A written agreement is signed, setting out the charitable purpose, what the funds may be used for, the request and approval process, the administrative charge, reporting obligations, and what happens if either side ends the arrangement.

4. The charity establishes a fund and solicits or receives contributions. Donors give to the charity, and the charity issues the acknowledgment.

5. Donors may earmark for the project, because the project is a program of the charity or is supervised by it. They may not direct the money to a named individual.

6. The charity disburses on request and approval, keeps records showing the funds were used for charitable purposes, and retains discretion throughout.

7. The relationship ends by agreement, by the project obtaining its own exemption, or by termination, and unspent funds move only to a charitable purpose the sponsor approves.

A hypothetical showing what the project actually receives. A community arts charity sponsors a neighborhood mural project. The project raises $50,000 from local donors, all of whom give to the charity and receive its acknowledgment. The written agreement sets the charity's administrative charge for the year at $4,000, so $46,000 remains available for approved project costs. The muralist submits invoices for paint, scaffolding and stipends; the charity reviews each one against the agreed charitable purpose and pays it. When the project ends with $3,000 unspent, that $3,000 does not go to the muralist. It belongs to the charity, which applies it to another purpose within its mission, or transfers it to another charity if the agreement so provides. Every figure here is invented for the example; a real sponsor's charge is a term of its own agreement.

What sponsorship gives a project

• It can accept tax-deductible contributions immediately, without waiting for its own determination letter.
• It becomes eligible for grants that are restricted to charitable organizations, which most foundation grants are.
• Someone else handles bookkeeping, acknowledgments, payroll and the annual filing, which for a small project is most of the administrative burden.
• It can test whether the work is viable before creating a permanent entity, and can wind down without dissolving one.
• A granting private foundation that gives the sponsor full control over the grant is relieved of exercising expenditure responsibility, which makes the project a more attractive grantee.

What it costs and what can go wrong

• The money is legally the sponsor's, not the project's, and a request is a request.
• The sponsor charges for administration, on terms set by its own agreement.
• Where the sponsor has no genuine discretion the arrangement is a conduit and the donor is not entitled to a deduction, which is a problem for the donor rather than for the project.
• Unspent funds stay with the sponsor at the end and can only move to another charitable purpose, so a project that plans to graduate should negotiate the transfer terms at the start.
• The project depends on the sponsor's continued existence, capacity and willingness, and on the sponsor's own compliance.
• A donor cannot direct money to a named individual through a sponsor. That is the failure the IRS material describes most often.