In the exempt-organizations context, fiscal sponsorship is a relationship through which a tax-exempt entity (sponsor) agrees to accept donations on behalf of another entity (project) that is, traditionally, not tax-exempt, including everything from informal associations of people to newly incorporated entities that have applied for but not received determination letters from the Internal Revenue Service (IRS).

Fiscal sponsorship is common throughout the United States and provides a mechanism for both sponsors and projects to achieve their charitable missions.

The project may solicit gifts and apply for grants through the sponsor. The sponsor, in turn, makes available to the project the funds raised for the project. The sponsor may also provide support services to the project, including administrative support. The fiscal sponsorship arrangement reduces the administrative burden on the project, reduces the need to develop potentially unwanted infrastructure, and allows the project to focus on their mission.

Fiscal sponsorship is particularly beneficial for short-lived projects, including those with a time-sensitive mission.

The fiscal sponsorship relationship is traditionally between a Section 501(c)(3) organization and an entity that does not have tax-exempt status. However, there is a growing trend for Section 501(c)(4) organizations, social welfare organizations, to serve as the sponsor (a social sponsor) of a project as part of a fiscal sponsorship arrangement (a social sponsorship). This may be a stand-alone relationship, but it is more common for the social sponsorship to occur in conjunction with a Section 501(c)(3) fiscal sponsorship (i.e., with a related organization), as discussed further below.

Section 501(c)(4) organizations are subject to different tax rules than Section 501(c)(3) organizations. Notably, Section 501(c)(4) may be organized and operated for a broader purpose, may spend more money to influence legislation (i.e., lobbying), and may engage in limited electioneering or political activity. Contributions to Section 501(c)(4) organizations are not tax deductible.

Despite the lack of tax-deduction for donors, there remain many benefits of entering into a social sponsorship. Section 501(c)(4) organizations and projects working with a social sponsor do not pay federal income tax on their net income (or profit), like Section 501(c)(3) organizations, and unlike for-profit organizations. Social sponsorship also provides a means for passionate organizations or even groups of passionate people to receive contributions of appreciated assets (e.g., gifts of stock). The sale of those assets by the social sponsor will not be subject to capital gains tax, which incentivizes donors to make gifts of significantly appreciated assets to Section 501(c)(4) organizations, as the donors will avoid tax on the appreciations, even though the donor will not be able to deduct the donations.

Likewise, donors will not owe gift tax on those donations to the social sponsor. Donors to Section 501(c)(4) organizations are also generally afforded more privacy and are not required to be disclosed on the annual tax return of the social sponsor (IRS Form 990, Schedule B). For many reasons, particularly for donors motivated to fund advocacy work, donations to a social sponsor may be an attractive option.

In addition to donor-related benefits, social sponsorship provides projects access to administrative support and infrastructure, just like fiscal sponsorship by a Section 501(c)(3) organization. This is particularly true for organizations, or motivated individuals, looking to influence new legislation or legislation resulting from a recent event. That being said, social sponsorship is not required to be temporary. Some projects may ultimately incorporate, file Form 8976, Notice of Intent to Operate under Section 501(c)(4), and file Form 1024-A.

Best Practices For Fiscal Sponsorship

There are several key considerations for both sponsors and projects when entering into any type of fiscal sponsorship, including a social sponsorship. Please note that there are several different types, or models, of fiscal sponsorship, and the best practices depend, to some extent, on the type of fiscal sponsorship. That said, there are a handful of universal best practices:

* Written Agreement: The rights and responsibilities of both the project and sponsor should be included in a written contract. The agreement should include a discussion of administrative fees, the mission of both the project and sponsor, expectations of both the project and sponsor, and intended duration of the relationship.

If any particular activity is disallowed (e.g., prohibited illegal conduct or conduct related to civil disobedience), these restrictions should be clearly communicated by contract.

* Financial Controls: As outlined in the written agreement, the project and sponsor should maintain an open dialogue regarding the distribution of funds to the project. This includes establishing a budget, undertaking financial audits as needed, discussing the investment and management of assets, monitoring fund balances, and developing operational systems to handle the funds.

* Written Policies and Procedures: The fiscal sponsor should also maintain written operational policies and procedures, to be provided to and adopted by the project, including a conflict of interest policy, to ensure that the project complies with the requirements and related best practices for Section 501(c)(4) organizations.

Best Practices for 501(c)(3)s Seeking Social Sponsorships

Organization that are tax-exempt under Section 501(c)(3) or considering applying for Section 501(c)(3) status may also work with a social sponsor. These organizations may be contemplating establishing a separate Section 501(c)(4) organization, thereby creating a “tandem” or affiliate structure. Most often, projects may seek a fiscal sponsorship arrangement simultaneously with both a Section 501(c)(3) organization and a Section 501(c)(4) organization, entering into a tandem or affiliate structure at the outset.

In this instance, as part of the tandem structure, there would be both (i) a social sponsor and social project relationship and (ii) a Section 501(c)(3) sponsor and a Section 501(c)(3) project relationship. Often the social sponsor and the Section 501(c)(3) sponsor are related organizations, simultaneously offering multiple types of fiscal sponsorship.

For example, say a group of motivated people banded together to help end homelessness. Those people may enter into a fiscal sponsorship with a Section 501(c)(3) organization, forming a Section 501(c)(3) project, to provide food and other necessities to persons experiencing homelessness as part of their charitable mission. Those same people may simultaneously enter into a social sponsorship, forming a social project, to spend significant funds to influence legislation related to ending homelessness. The two projects may have similar missions and share board members, employees, and office space, but are to remain separate.

There are several additional best practices to keep in mind when entering into a social sponsorship, in a tandem or affiliate structure, in which the Social project is related to but separate from the Section 501(c)(3) project.

* Separate Contracts: Organizations or projects should enter into separate contracts with the social sponsor and the Section 501(c)(3) fiscal sponsor. The contracts should clearly specify the transacting parties, thereby indicating the separation between the Section 501(c)(3) project and the Section 501(c)(4) project. Often the Section 501(c)(3) fiscal sponsor and the social sponsor will be related organizations.

* Maintain Separation and Independence: As with any tandem or affiliate structure, care should be taken to maintain the separation between the Section 501(c)(3) project and the Section 501(c)(4) project. For example, it is recommended that both projects include non-overlapping and otherwise independent directors, where applicable, to vote on transactions between the Section 501(c)(3) project and the Section 501(c)(4) project (an “interested” transaction) and to indicate to the IRS and others that the organizations or projects are indeed separate.

* Use of Funds: The projects should not comingle funds distributed by or through the Section 501(c)(3) fiscal sponsor with those distributed by or through the social sponsor. This may also be required by the sponsors. For example, the Section 501(c)(3) fiscal sponsor may require guarantees that the funds disbursed are not used for lobbying. The related projects, if possible and if applicable, should maintain separate bank accounts for the separate projects reflecting the engagement of two separate sponsors.

* Sharing Resources: It is very common for related projects (i.e., the project associated with the social sponsor and the project associated with the Section 501(c)(3) sponsor) to share resources, including employees and office space. In this situation, it is recommended that one project charge the other project the cost associated with employment arrangement, including benefits paid to the employee and administrative overhead (e.g., support staff, mobile phone, home-office, etc.).

The amount charged should reflect typical commercial rates, determined using a reasonable basis, to ensure the Section 501(c)(3) project is not subsidizing the social project. Many sponsors will also manage such arrangements.

* Joint Fundraising: Tandem organizations often will jointly fundraise. When jointly fundraising, the projects should clearly communicate to donors, both before and after donation, the recipient organization and comply with the requirements of the sponsor, as provided for in the written agreement.

All in all, the growth of social sponsors is an interesting development in the long history of fiscal sponsorship, providing benefits to willing donors and many mission-driven organizations.

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Paul Mourning is a partner and co-chair of Transactions Department of Crowell & Moring. His email is pmourning@crowell.com Eleanor Moran McWaters is counsel at Crowell & Moring. Her email is emcwaters@crowell.com

Paul Mourning

Eleanor Moran McWaters

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