Here are some of the highlights from the second two American Bar Association Exempt Organizations Committee sessions held on October 6 as part of the ABA Virtual Fall Tax Meeting. You can find Part One of this post here. As with all of our posts capturing highlights of events, my interpretations, opinions, and additions of supplemental resources may be sprinkled in with the information provided by the presenters.
Navigating and Managing Affiliated Entities: Structuring (c)(3)-(c)(4) and (c)(3)-For-Profit Relationships
- The reason for the affiliation should inform how it is navigated and managed – consider the following examples:
- A public charity with an affiliated social welfare organization that engages in lobbying and some political campaign intervention work in furtherance of both organizations’ common mission
- A business corporation with an affiliated corporate foundation that makes grants to organizations which also supports the corporation’s public relations and marketing goals
- A public charity with a wholly-owned for-profit subsidiary
- A public charity participating in a joint venture with one or more for-profit entities
- A private foundation with an affiliated family office
- The 501(c)(3) organization in the affiliation must ensure compliance with 501(c)(3) laws, including the Operational Test – see, e.g., 501(c)(3) Operational Test, and if it is a private foundation, the private foundation laws – see, e.g., Private Foundation Rules
- Key principle: Charitable dollars may not be used to subsidize non-charitable activities of the affiliate; accordingly, a 501(c)(4) organization must pay at least its fair share of all shared resources with its affiliated 501(c)(3) organization
- The 501(c)(4) organization in the affiliation must ensure compliance with 501(c)(4) laws – see, e.g., 501(c)(4) Social Welfare Organizations
- The for-profit organization in the affiliation may take on many forms, including a corporation, a benefit corporation, and a limited liability company
- Operations
- Separate: Finances, governance, communications, consultants, intellectual property
- Sharable resources: staff (but implementation may be tricky – e.g., common paymaster setup), IT infrastructure, office infrastructure
- Implementation Considerations
- Founding questions
- Change management
- Training/guidance
- Governance
- Legal affairs
- Finance Operations & Resource Sharing
- Technology & Security
- Communications
- Grants & Contract Management
- Human Resources
- Building out (c)(3) / (c)(4) infrastructure requires significant cross-org collaboration
- Maintaining (c)(3) / (c)(4) infrastructure – keys include identifying risks and determining risk tolerance, training, learning orientation, humility, flexibility, communication/alignment, legal guidance
- Labor and Employment Considerations: Joint Employers & Department of Labor (DOL)’s proposed regulations
- Joint employers vs. Single Employer/Integrated Enterprise
- Employee vs. independent contractor
- Certain employment and labor laws have applicability thresholds based on the number of employees – an organization can be a joint employer even if it did not hire or pay the employee, which may mean that the organization hits some minimum employee threshold triggering the application of certain laws
- Fact Sheet #14A: Non-Profit Organizations and the Fair Labor Standards Act (FLSA) (DOL)
- Department of Labor has proposed regulations defining “joint employer” that would apply to: FLSA, FLMA, and MSPA – DOL’s proposed regulations on Joint Employer, 91 Fed. Reg. 21878 (4/23/26) – See Notice of Proposed Rule (DOL)
- Title VII and Joint Employers – EEOC Test focuses on control – Enforcement Guidance: Application of EEO Laws to Contingent Workers Placed by Temporary Employment Agencies and Other Staffing Firms (EEOC)
Fiscal Sponsorship and Other Intermediary Arrangements in Practice: Navigating Control, Discretion, and Compliance
Presented by: Erin Bradrick (NEO Law Group), Allison Heimann (Morgan Lewis), and Andrew Schultz (Adler & Colvin)
- Fiscal sponsorship – undefined by statutory law, but the term broadly refers to contractual relationships that allow tax-exempt activities to be advanced by a non-exempt entity or individual with the benefit of the tax-exempt status of the fiscal sponsor
- Recent developments – increased scrutiny of fiscal sponsorships and awareness among political actors; Treasury’s Form 990 Transparency Initiative for fiscal sponsorships and the Treasury/IRS Priority Guidance Plan; H.R. 9721 proposes new disclosure requirements for 501(c)(3)s that enter into “fiscal sponsorship programs” and taxation/denial of deduction for “improper conduit arrangements”
- Model A fiscal sponsorship – Project is an internal program of the fiscal sponsor
- Project is an internal program of Sponsor organization
- Day-to-day management is typically delegated to an advisory committee and/or project director (both of which are typically operating as agents of Sponsor)
- Sponsor may receive purpose-restricted donations or grants for the Project
- Sponsor typically allocates a portion of restricted funds to its general operating fund to cover costs, often structured as a percentage of funds raised
- Direct/operational expenses of Project are paid for by Sponsor from the restricted fund
- Fiscal sponsorship agreement – termination provision – important for Sponsor (1) to maintain the right to consent to any successor, and (2) to provide clarity on the transfer of liabilities to a successor (often a tricky part of a spinoff)
- Model C fiscal sponsorship – Project remains run by a separate entity, which receives grants from the fiscal sponsor
- Project entity is and remains a separate legal entity
- Sponsor-Project entity relationship is a grantor-grantee relationship
- Project entity is responsible for all Project activities and associated liabilities
- Donations and grants are contributed to Sponsor for the purposes of the Project, but are not required to be re-granted to the particular Project entity
- Sponsor typically allocates a portion of restricted funds to its general operating fund to cover costs, often structured as a percentage of funds raised
- Sponsor makes grants to the Project entity, in its discretion, from such restricted fund for the 501(c)(3)-consistent purposes of the Project
- Fiscal sponsorship agreement – funds raised by Sponsor are restricted as to purpose not recipient (Sponsor cannot be a mere conduit or pass-through)
- Model C “Plus” – often see Project entities that desire additional services/support from Sponsor beyond grants – if done, should be a separate and distinct transaction from fiscal sponsorship relationship (with an understanding of the elevated risks to Sponsor associated with the Project)