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 Charges to the Project’s Fund

• These are internal charges to the project’s fund that are satisfied by transfers to the fiscal sponsor’s general fund
• Such internal transfers 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 A
  • Defining the other party to the agreement with the fiscal sponsor
  • Termination provisions
  • Intellectual property ownership
  • Sponsorship policies
• Model C
  • Restricted fund as to purpose, not to any recipients
  • Project (grantee) controls activities
  • Fundraising activities – carried on by authorized agents of the fiscal sponsor
  • Reporting requirements
  • Private 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 applicable
• See Donor-Advised Funds: What You Should Know

Fiscal Sponsorship in the Arts

• Typically, Model C
• Charitability
• Private benefit
• Earmarking 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 deductible
• Electioneering is prohibited

501(c)(4) Fiscal Sponsorship

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

Project Spin-Ins and Spin-Outs

• Spin-in
  • Due diligence / intake (like a merger) – how much information, sources of information, reviewing parties (HR, legal, finance, program)
  • Liability risks
  • Language of transfer agreement
• Spin-out
  • How much information to share with transferee (successor fiscal sponsor)
  • Representations and warranties
  • Causes for denial of transfer
  • Holdback of funds – how much, how long
  • Transfer of liabilities – all associated with project or only know and named
  • Assignment of contracts
  • Transfer to non-exempt entity (e.g., pending 501(c)(3) determination)

Random Issues

• UBIT Silo Rules – see UBIT Silos: Final Regulations
• Worker 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