Transcript conferences.unitedway.org

Fiscal Sponsorship
Doing it Right!
October 8, 2013
Stephanie L. Petit
Adler & Colvin
www.adlercolvin.com
www.nonprofitlawmatters.com
© Adler & Colvin
What is Fiscal Sponsorship?
• It is not in the Internal Revenue Code
• It is not in any corporations code
• It is a tool, a practical construct!
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What is Fiscal Sponsorship?
Usually refers to an arrangement between a
501(c)(3) public charity and a project in which,
typically, the charity receives and expends
funds to advance the project while retaining
discretion and control over the funds.
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Not Fiscal Agency
• Fiscal Agency – wrong term
• Fiscal Sponsorship – right term
• Why?
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Two Main Ways to Do It Right
• Direct Project (“Model A”)
• Pre-Approved Grant (“Model C”, “Indirect”)
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Direct Project Model
1. Project belongs to sponsor
2. Project is not a separate legal entity
3. Project personnel are employees /
volunteers of sponsor
4. Contributions belong to sponsor
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Direct Project Model
5. Sponsor reports revenue and expenses
6. Sponsor is liable
7. Sponsor OWNS project
8. Project may have advisory committee
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Main Legal Steps
• Project director or directors establish a
contract with sponsor.
• Sponsor’s board has already approved an
FS program or approves now.
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Pre-Approved Grant Model
1.
2.
3.
4.
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Project belongs to grantee
Project is in a separate legal entity
Project personnel work for grantee
Charitable contributions go to sponsor first
Pre-Approved Grant Model
5. Sponsor retains “variance power”
(discretion and control)
6. Sponsor reports contributions in and
grants out
7. Grantee is liable for project
8. Grantee reports grant in and expenses out
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Pre-Approved Grant Steps
1.
2.
3.
4.
5.
6.
7.
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Written grant proposal from project
Sponsor evaluation of proposal
Sponsor Board approval
Written grant agreement
Proper solicitation of funds
Proper accounting for funds
Reports from grantee to sponsor
Problems Common to Both
Models
1. Sponsor is “absent,” or
“We are just using their 501(c)(3)”
2. No written agreement
3. Confusion with DAF or other programs
4. Sponsor or project mischaracterizes
relationship
5. Donor confusion about recipient
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Direct Project Problems
1. Sponsor fails to plan for liability
2. No pre-nuptial agreement
• Dealing with the break-up
3. Ownership of intellectual property
4. Project spends more than it has
5. Treatment of employees
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Pre-Approved Grant Problems
1. Failure to pre-approve the pre-approved
grant
2. Grantee fails to report income
3. Ownership of intellectual property
4. Grantee fails to report back to sponsor
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Model B – A Mashup?
• Like Model C – another entity conducts
project
• Like Model A – sponsor more than just a
grantor
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Model F
• Purely administrative – no “discretion and
control”
• Project in driver’s seat
- Not always considered fiscal sponsorship
• For-profit can do
• For exempt organizations, beware possible
unrelated business income tax
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Group Exemption
• Procedure where a 501(c)(3) obtains ruling
from IRS that it is the “central” organization
or “head” of a group ruling
• Head organization steps into shoes of IRS to
determine if organizations with whom
affiliated meet 501(c)(3) and public charity
standard (“subordinates”)
• Common for churches, groups with local /
regional affiliates
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Group Exemption
• May – or may not – involve provision of
administrative services
• Contribution to subordinates need not go to
head organization
• Resource: IRS Publication 4573
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Supporting Organization
• A 501(c)(3) public charity (not a private
foundation) that has public charity status by
virtue of its relationship with another public
charity
• Tests (relationship, organizational,
operational, lack of donor control)
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Supporting Organization
• May – or may not – involve provision of
administrative services
• Contributions to supporting organization
need not go to supported organization
(typically, would not)
• Resource: http://www.irs.gov/Charities-&Non-Profits/CharitableOrganizations/Supporting-OrganizationsRequirements-and-Types
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FUNDING SOURCES
Private foundations
Government agencies
Individual donors
Corporate donors
SPONSOR
PROJECT
LLC
MODEL L – SINGLE MEMBER LLC
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Model L – Single Member LLC
• Sponsor is sole member (owner)
• LLC disregarded for federal tax purposes but
liabilities separate from sponsor’s under
state law
• Substitute for Model A if high liability
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Legal Steps
• LLC is organized with Sponsor as sole
member and executes an LLC operating
agreement
• Sponsor and LLC may enter into a service or
sponsorship agreement
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IRS Comments
IRS Notice 2012-52, allowing 501(c)(3)s to
have subsidiary LLCs for liability protection,
receiving deductible donations directly from
the public.
See:
http://www.nonprofitlawmatters.com/2012/08/0
9/irs-issues-guidance-on-the-deductibility-ofdonations-to-llc-subsidiaries-of-section-501c3organizations/
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Resource for Model L
“The Use of LLCs in Fiscal Sponsorship – a
New Model” available at “publications” page of
www.adlercolvin.com or
http://www.adlercolvin.com/resources/basicresources.php#tab_publications
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Recent Developments
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IRS-Related Comments
• 2012 ACT (Advisory Committee on Tax
Exempt and Government Entities) report to
the IRS recommends fiscal sponsorship in
some circumstances and also asks for
guidance (http://t.co/5YdOln4m)
• Post-Hurricane Sandy IRS encourages use
of existing organizations instead of setting up
new charity (announcement IR-2012-87)
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State Charitable Trust Law
Increased attention to charitable trust doctrine
under state law.
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Using State Charitable Trust Law
to Protect Project Assets
“Because the restricted fund is held under the
charitable trust doctrine for the purposes of the
Project as understood by and with funding
sources, the parties intend that assets in the
restricted fund shall not be subject to the claims
of any creditor or to legal process resulting from
activities of Sponsor unrelated to the Project.”
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Fiscal Sponsor Collapses
• International Humanities Center
(http://www.nonprofitlawmatters.com/2012/02/16/
doing-right-by-the-projects-fiscal-sponsorship-afterihc-2/)
• Other examples (e.g. Help is Here)
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Legislation in California: AB 2327
• Effective January 1, 2013
• California Government Code Section 12599.8
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New California Government Code
Section 12599.8
“For any year that the balance sheet of a
charitable organization shows that it holds
restricted net assets, while reporting negative
unrestricted net assets, the organization shall
provide an explanation of its compliance with its
charitable trust responsibilities and proof of
directors' and officers' liability insurance
coverage to the Attorney General's Registry of
Charitable Trusts.”
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Resources
• Fiscal Sponsorship: 6 Ways To Do It Right, 2005
edition
• www.fiscalsponsorship.com
• www.fiscalsponsordirectory.org
• National Network of Fiscal Sponsors:
www.fiscalsponsors.org
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