Fiscal sponsorship is a complicated relationship to understand because it is not defined by law, it takes on multiple forms, there are nonprofits that have improperly structured fiscal sponsorship relationships (misleading others), and, in one form (comprehensive or Model A fiscal sponsorship) it allows for what may appear to be autonomous projects which engage in no external reporting. Because there are nuances to fiscal sponsorship, this post should be read with the preface – “generally speaking” and with the understanding that it does not cover some rare exceptions.

Comprehensive Fiscal Sponsorship (Model A)

In a Model A fiscal sponsorship, the sponsored project is owned and operated by the fiscal sponsor. The other party to the fiscal sponsorship agreement may have rights to enforce the agreement, terminate the fiscal sponsorship, and spin off the project with the associated assets and liabilities.

However, the other party, and any individuals associated with that other party, should not fundraise, manage, or direct the project other than as an authorized agent of the fiscal sponsor.

This allows the fiscal sponsor to have sufficient control and discretion over the project to treat it as an internal and integral part of the fiscal sponsor like any internal program or division of a charity.

Charitable Contributions to a Model A Project

A charitable contribution benefiting a Model A project is likely made as a contribution restricted to the charitable purpose of the project. It would very rarely ever be restricted to a specific individual or individuals leading or managing the project.

Accordingly, there would be no need for a fiscal sponsor to notify a donor if it exercised its control and discretion in selecting other persons or even another entity to advance the restricted purposes with such donor’s contribution. This would be akin to a charity simply replacing its program staff or granting funds to advance its charitable purpose rather than using such funds to do so itself.

Donor Intent

Understandably, charities regulators are interested in protecting charities from diversions of charitable assets and, by extension, in protecting donor intent with enforcement of laws that ensure lawful donor restrictions on their contributions are observed by recipient charities.

However, a fiscal sponsor charity cannot accept as charitable contributions funds that are restricted in a manner that requires:

• the fiscal sponsor to transfer such funds to another person or entity, particularly if the transferee is not a public charity;
• the donor (or related person or entity) to receive a benefit from the fiscal sponsor that is more than incidental, quantitatively and qualitatively, to furthering the fiscal sponsor’s charitable purpose (see section on Prohibited Private Benefit below);
• the fiscal sponsor to keep employed certain individual or individuals when doing so would provide such persons with a prohibited private benefit (e.g., where the fiscal sponsor believes keeping such persons employed would be in conflict with the best interests of the organization);
• the fiscal sponsor to lose its right to terminate the fiscal sponsorship agreement, even if such termination would be in the best interest of the fiscal sponsor and would not make impossible the fiscal sponsor’s ability to expend the donor’s funds in furtherance of the charitable purpose of the project.

Prohibited Private Benefit

Organizations that are exempt under Section 501(c)(3) of the Internal Revenue Code must not provide a benefit to any person or entity other than one that is incidental, quantitatively and qualitatively, to furthering its tax-exempt purposes. Excessive compensation, favored access to organizational resources, and other utilization of organizational funds or assets to benefit some person or entity may all represent forms of prohibited private benefit.

Tension With State Regulators

State regulators attempting to protect donor intent must be careful not to provide donors with more control over their completed charitable contributions than they should have under federal tax law governing completed gifts.

With respect to intermediary organizations like donor advised fund sponsoring organizations and fiscal sponsors, the law allows donors to have contractual rights to recommend how their donated funds are granted or invested. However, providing donors with additional rights may be problematic. Is it really a completed gift if the donor retains greater control beyond advisory privileges?

In California, recent legislation regarding charitable fundraising platforms and platform charities gives donors additional rights of being informed and making alternative selections of recipient charities if their initial recommendations are not followed. The charitable fundraising platform or platform charity (CFP/PC) must follow the donor’s selections so long as the recipient charity qualifies as eligible. This seems to me to be inconsistent with federal tax law if the contribution to the CFP/PC was to a donor advised fund (DAF). In such case, the donor cannot maintain that level of control over contributed funds for which the donor may have taken an income tax deduction. While the California laws generally exclude DAFs in the definition of a DAF and PC, there are conditions to the carve-out.

I further think that restricting donor rights post-contribution is appropriate even outside of the DAF context where the CFP/PC is recognized as the lawful recipient of the gift. In such case, the CFP/PC would itself provide a written substantiation to the donor. This would confirm that the CFP/PC was not merely a custodian of the funds acting as an agent of the donor or the ultimate recipient charity. This scenario happens where the 501(c)(3) CFP/PC solicits gifts that describe its future intent to regrant such gifts and accepts recommendations (but not direction) from the donor of a possible named recipient charity, but in circumstances where the fund created by such gift is not a DAF (e.g., where it is a single entity fund with a single identified beneficiary).

What makes all of this more complicated is that the definition of a DAF is still evolving. In late 2023, the IRS/Treasury released proposed regulations for public comment, the first of several parts announced, but the status of the proposed regulations remains unknown at this time. For fiscal sponsors, it’s important to note that the restricted funds for Model A projects could fall within the existing definition of a DAF. In such instances, the fiscal sponsor must ensure that it does not cede control to the donor (which might be an individual or a private foundation) or any donor advisor.