Page 209 - Washington Nonprofit Handbook 2018 Edition

are public charities. To gain access to those revenue sources, organizers of a
particular project can establish a fiscal sponsorship with a 501(c)(3) organization.

The Sponsor in a fiscal sponsorship agrees to receive and disburse funds for
the project on behalf of the sponsored organization. Donations are made directly
to the sponsoring organization, which runs the funds through its books and
includes the funds as part of its income on its reports to the IRS. Subsequent
disbursements are then made to, or on behalf of, the sponsored organization. An
administrative fee is usually paid to the sponsor by the sponsored organization.

In Revenue Ruling 68-489, 1968-2 C.B. 210, the IRS set forth the following
three guidelines for arrangements like fiscal sponsorships to ensure that such
arrangements are not used to circumvent laws governing charitable giving:

(1) The sponsored project must further one or more of the charitable
purposes of the sponsor. The sponsor should determine not only that the project
will further a specific charitable purpose of the sponsor, but also that the
sponsored project, or the legal entity or organization accepting funds for the
sponsored project, will not engage in any other activities that might jeopardize the
sponsor’s tax-exempt status. For example, the fiscal sponsorship agreement
should prohibit political activities and restrict lobbying activities during the term of
the fiscal sponsorship.

(2) The sponsoring organization must maintain records establishing that
the funds were actually used for such charitable purpose. The sponsor should
establish procedures in the agreement for ongoing oversight of the sponsored
organization. For example, the sponsoring organization may require periodic
reports regarding the use of funds disbursed for the sponsored project. The level
of oversight and control can vary from regular reporting obligations for the
sponsored organization to the direct submission and payment of invoices for the
sponsored project by the sponsor.

(3) The sponsor must retain control and discretion (described as
“complete discretion and control” in related IRS rulings) over the use of the funds.
In other words, the sponsor must make disbursements for the sponsored project
as if the sponsor is undertaking the project as part of its own operations and is
solely legally and financially responsible.

These guidelines reflect the IRS prohibition of a “conduit” transaction. A
donor could not make a deductible donation directly to the sponsored

organization, since it does not have tax-exempt status. Thus, if a donation is made

WASHINGTON NONPROFIT HANDBOOK -198- 2018