Page 210 - Washington Nonprofit Handbook 2018 Edition

to the sponsor with a requirement that it be disbursed for the sponsored project
(i.e., the donation is “earmarked”), the IRS deems that the donation has been made
to the non-exempt sponsored project and no deduction is allowed. This is a
conduit transaction. To avoid this “pass through” characterization, the sponsor
must have discretion to refuse to disburse funds if the sponsored project engages
in any activities that would be prohibited for the sponsor as a tax-exempt
organization, or uses the funds for purposes other than to implement the agreed-
upon sponsored project.

All parties should realize that in a fiscal sponsorship there are actually two
levels of granting. In the first level, the donor agrees to make a grant to the
sponsor, usually provided certain conditions are satisfied. In the second level, the
sponsor agrees to support the sponsored project, again provided certain conditions
are satisfied. Thus, the sponsor is responsible for satisfying any requirements of
the original donor, and the sponsored project is responsible for satisfying the
requirements of the sponsoring organization. This means that the sponsoring
organization must agree to the fiscal sponsorship of the sponsored project giving
the sponsor complete discretion and control over any funds prior to accepting any
funds for the sponsored project

What should be in a Fiscal Sponsorship Agreement?

The agreement between the sponsoring organization and the sponsored
organization should be in writing and should set forth:

y A description of the project and the charitable purpose of the
sponsoring organization it furthers;

y Any performance requirements for the project;

y Prohibited and restricted activities of the sponsored organization and
project;

y When and how donations will be solicited and whether there will be
any restrictions on solicitations (to avoid situations where multiple
requests are made to the same source);

y A description of how the sponsor will account for the funds to be
made available to the sponsored project;

y When and how donations will be remitted to the sponsoring
organization and disbursed to the sponsored project;

WASHINGTON NONPROFIT HANDBOOK -199- 2018