Model C: The “Preapproved Grant Relationship” Model In another common structure, the Sponsor indirectly furthers its exempt purposes through grants to a Project entity. In this model, the Sponsor is and remains a separate legal entity from the Project entity. The Sponsor and Project entity enter into a grant agreement that preapproves the entity as a grantee. The Sponsor then receives funding from outside sources and regrants those funds to the Project entity in accordance with the terms of the grant agreement. The Sponsor has less control over the Project, but it also bears fewer Project liabilities. The Project entity is responsible for the day-to-day needs like Project activities, employment matters, contracting, risk-management, legal obligations, and insurance. The Sponsor has a duty to monitor the Project and ensure the funds are spent in accordance with the Sponsor’s charitable purposes. Other Models Models A and C are the most often utilized forms of fiscal sponsorship, but others exist as well. Model D—the “Group Exemption” Model. A sponsor shares its tax-exempt status with subordinate Project entities by obtaining a “group exemption letter” from the IRS. The subordinate entities avoid the lengthy 501(c)(3) application process, but they still fundraise and receive donations in their own name. Model F—the “Technical Assistance” Model. The Sponsor only provides the Project practical administrative help like bookkeeping, accounting, or payroll services. Model L—the “Single-Member LLC” Model. The Project is a single-member LLC where the Sponsor is the single member. The IRS considers the LLC’s tax status to be that of its single member: tax-exempt. Accordingly, the LLC can receive donations in its own name. Alternatively, the Sponsor can receive donations in its own name, regranting them to the LLC or even making capital contributions to the LLC. Throughout, the LLC maintains administrative independence, and the Sponsor is protected from many Project liabilities. RISKS OF FISCAL SPONSORSHIP Fiscal sponsorship has received criticism as well. Recently, members of Congress have expressed concern that tax-exempt entities are using fiscal sponsorship structures to fund entities with ties to foreign countries or illegal activities. The risk for Sponsors is that they often materially fund entities they have little control over, and certain movements in Congress aim at attributing actions of individual subordinates to entire exempt entities. Likewise, if a Sponsor fails to oversee and control the Project, the relationship could be seen as nothing more than a series of pass-through or conduit transactions, which jeopardizes the Sponsor’s tax-exempt status. Also, by connecting itself to a Project, the Sponsor puts its reputation on the line. Finally, sponsorship can result in additional operational, administrative, and financial responsibilities on the Sponsor’s staff and systems. Organizations should consider these risks and consult professionals when evaluating whether to enter into a fiscal sponsorship relationship. CONCLUSION Though some risks exist, fiscal sponsorship is an effective and increasingly common way for nonprofit organizations to enhance their impact by assisting others to further the nonprofit’s charitable purposes. Hannah Fischer Frey is a partner at Baird Holm LLP, focusing on corporate transactions, federal and state tax planning issues, and tax-exempt matters. Fischer Frey has addressed complex partnership and corporate tax issues, including business reorganizations, private equity fund structuring, business succession planning, and tax planning in mergers and acquisitions. She has been closely involved in numerous federal and state tax examinations and audits. Christopher Thorpe was a summer associate for the firm. For more information, call (402) 344-0500 or email hfrey@bairdholm.com. Endnotes 1 See National Foundation Inc v. US, 13 Cl. Ct. 486 (Ct. Cl. 1987); Rev. Rul. 68-489. 2 See Gregory L. Colvin and Stephany L. Petit, Fiscal Sponsorship: 6 Ways To Do It Right, (Geoffrey Link, ed., 3d ed. Study Center Press 2019). 3 For ease of reference, practitioners often use letters of the alphabet to refer to the different types of models. 4 In the Model B “Independent Contractor Model” variation, the Sponsor owns and controls the Project, but contracts out the daily operations to another entity. The Project is therefore carried out by independent contractors of the Sponsor instead of by its employees. 23 nescpa.org
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