Fiscal Sponsorship – Some Tricky Issues: CLA Presentation

Today, NEO Law Group’s Erin Bradrick presented to the California Lawyers Association’s Nonprofit Organizations Committee on some tricky issues involving fiscal sponsorship. The focus was on 501(c)(3) fiscal sponsors and projects. Some highlights below:

Common Models

Comprehensive (Model A)Pre-approved Grant Relationship (Model C)For a brief summary of these models, see Erin’s article for Business Law Today (ABA): Fiscal Sponsorship: What You Should Know and Why You Should Know It

Fiscal Sponsorship Fees

These are intra-organizational feesAs internal transfers from a restricted fund to the general fund, they do not represent income separate from the original donations/grants/earned income (make sure your accountant understands this)

Key Provisions in the Fiscal Sponsorship Agreement

Model ADefining the other party to the agreement with the fiscal sponsorTermination provisionsIntellectual property ownershipSponsorship policiesModel CRestricted fund as to purpose, not to any recipientsProject (grantee) controls activitiesFundraising activities – carried on by authorized agents of the fiscal sponsorReporting requirementsPrivate benefit considerations

Donor Advised Fund Issue

Example: Model A Project that engages in grantmaking where the donor of the funds which make up the source of the grants (or a person selected by such donor) advises on the investment and/or distributions – the portion of the restricted fund for the project originating from the donor may be a donor advised fund (DAF)Consider whether the fiscal sponsor has engaged in a DAF analysis and can comply with DAF rules, if applicableSee Donor-Advised Funds: What You Should Know

Fiscal Sponsorship in the Arts

Typically, Model CCharitabilityPrivate benefitEarmarking considerations with funders

Advocacy, Lobbying, and Electioneering Activities

Model A – Federal lobbying limits apply to the fiscal sponsor across all projects and not on a project-level basis (except pursuant to internal policies or the fiscal sponsorship agreement)Model C – Use of grant funds by grantee for lobbying may be lobbying expense of fiscal sponsor and, in some cases, other lobbying activities of grantee may be attributed to the fiscal sponsor (language in the fiscal sponsorship grant agreement is important!)Donation designated for a lobbying project could be considered “earmarked for lobbying” and thus not deductibleElectioneering is prohibited

501(c)(4) Fiscal Sponsorship

Different federal tax law requirements, particularly with respect to lobbying activities, electioneering, deductibility of contributionsComplexities in navigating affiliations with 501(c)(3) fiscal sponsors / projects

Project Spin-Ins and Spin-Outs

Spin-inDue diligence / intake (like a merger) – how much information, sources of information, reviewing parties (HR, legal, finance, program)Liability risksLanguage of transfer agreementSpin-outHow much information to share with transferee (successor fiscal sponsor)Representations and warrantiesCauses for denial of transfer Holdback of funds – how much, how longTransfer of liabilities – all associated with project or only know and namedAssignment of contractsTransfer to non-exempt entity (e.g., pending 501(c)(3) determination)

Random Issues

UBIT Silo Rules – see UBIT Silos: Final RegulationsWorker Classification (Employee / Independent Contractor) – consider both federal tax laws and state laws (e.g., California AB 5)Grants to individuals and small businesses – see Grants to Individuals and Businesses – Part One


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