Jay's World of Abstracts 00031

Fiscal Agents

An interpretation of IRS rules

[Standard disclaimer: The nature of abstracts are that they are pieces of something larger. Not everyone is going to be happy with my choice of abstracts from any larger work, so if you are dissatisfied, I would refer you to the original document, which should be able to be found on the Internet. I encourage others to make their own abstracts to satisfy their needs. I would be happy to publish them here.

Jay's Introduction

Any group that seeks to take donations or grants to do something good for society faces a very challenging problem: the determination of tax exemption. Many groups in our state form a non-profit corporation and seek such determination from the IRS over a long period. This is often only practical for larger groups that already have expertise and funding to become an organization. In our area, groups often use another method, making use of a fiscal agent or, more properly, a fiscal sponsor. There are some advantages to this arrangement, but there are some down-sides as well. Below is a nice, short paper on this subject.

I produced this abstract using time paid for by the Quay County Maternal Child and Community Health Council with funds from the New Mexico Department of Health.

Abstracts

Fiscal Agents

In Revenue Ruling 68-489, 1969-2 C.B. 210, the IRS held that a 501(c)(3) organization can distribute funds to organizations which have not, themselves, received IRS recognition of 501(c)(3) status, if certain steps are taken to insure that the funds are used only for charitable, educational or other 501(c)(3) purposes.

Only a few guidelines are set forth in the ruling:

funds must be used for specific projects in furtherance of the sponsor’s own exempt purposes
the sponsoring organization must retain control and discretion as to the use of the funds
the sponsoring organization must maintain records establishing that the funds were used for section 501(c)(3) purposes

Based on this ruling, many 501(c)(3) organizations have sponsored other, non-exempt organizations or projects. These arrangements are called by many names - umbrella, fiscal agent, fiscal sponsorship...

In a typical arrangement, the non-exempt organization solicits grants or donations, donors make out their checks to the tax exempt sponsor, and the sponsor pays expenses on behalf of, or makes a grant to, the non-exempt organization, sometimes taking a percentage of the donation as a fee. The sponsor may also take care of reporting for the non-exempt organization’s employees, allow the use of its bulk mailing permit, and/or provide office space, use of office equipment or clerical help.

Many of these arrangements go far beyond the scope of what is described in Revenue Ruling 68-489. While not necessarily illegal, these kinds of arrangements can be risky, precisely because they are carried on within a gray area of the law. Many small or newly formed non-profit organizations could not exist without sponsorship of this kind, but it should not be relied on for a lengthy period of time, or if substantial amounts of money are involved.

Generally, tax law does not permit charitable contribution deductions for gifts to non-exempt organizations. If the IRS perceives a fiscal agent arrangement to be a strategy to circumvent the law, no more than a conduit or pass through arrangement, every party involved - the sponsor, the non-exempt organization, and donor - can end up with tax problems.

At a minimum, an organization offering to act as a fiscal agent should adopt a written internal policy governing sponsorship arrangements, require written proposals from sponsorees, enter into formal sponsorship agreements with them, and establish on-going oversight and follow-up procedures.