Tuesday, November 28, 2023

More on Fiscal Sponsorships: The Poorer Peoples' Donor Advised Fund

Understanding the Fiscal Sponsorship Life Cycle | Arabella Advisors

We posted last summer about a quick read on Fiscal Sponsorships.  New research out yesterday apparently confirms all the fuss about fiscal sponsors making charitable activities more do-able.  Remember when DAF's were advertised as the poor person's private foundation?  Fiscal Sponsorships are the poorer person's public charity.  The poor person who can afford a DAF but not a whole private donation is richer than a lot of folk I'll tell you that.  Consumer Reports says the bare minimum to open a DAF is between $5,000 and $25000, peanuts for some I guess.  I found a few online advertising no minimum at all, but why?  For some, even the $5000 bare minimum is too much.  So fiscal sponsors are to public charities what donor advised funds are to private foundations.  With fiscal sponsorships, there is no paperwork, no nothing except some simple agreement between a 501(c)(3) sponsor and some people too poor to afford their own (c)(3). By the way, I am pretty sure that a sponsor that does nothing other than administrative services for other real charities is itself not a real charity. That is, its not tax exempt. A couple of ex-NFL players are running one such operation. But see Treas. Reg. 1.502-1(b) and this article published about 100 years ago. 

But fiscal sponsorship can also be a useful for a larger public charity that is thinking of expanding its charitable reach into new activities.  It might sponsor a legally separate entity first, just to see how things work without committing itself to full fledged legal exposure.  

There is a fairly thorough background report out in yesterday's Chronicle of Philanthropy.  Here is an excerpt:

Fiscal sponsorship is a significant and rapidly growing part of the nonprofit world, according to a new report from Social Impact Commons and the National Network of Fiscal Sponsors. The report and experts involved in the sector indicate that the rise of fiscally sponsored projects appears to be both a response to the bureaucratic complexity of establishing and running a nonprofit and the increasing professionalization of the field. It’s being used as a way to pool resources, incubate new ideas, and provide oversight to organizations that are not yet charities.

The last 20 years have seen larger growth in the field than the previous 50, the report found, and demand for fiscal sponsors has surged since 2020. Seventy-one percent of survey respondents said demand for their services increased during the pandemic, and many are experiencing growing pains. The model, which has been around since at least 1959, when the Massachusetts Health Research Institute in Boston began offering a form of fiscal sponsorship for public and community health research efforts, has gained currency as a simpler way to organize charitable work at a time when the pandemic, racial reckoning, and other local and national concerns such as education and the environment are motivating people to quickly mobilize for social change.

The arrangement comes in many forms. Some sponsors centralize back-office support like accounting, human resources, and sometimes assistance with fundraising and leadership development for groups that don’t have nonprofit status. Others offer a purely financial relationship in which the sponsor receives the tax-deductible funds on behalf of a group that does not have charity status and passes the funds along. Most take a fee, which can vary widely depending on the sponsor and the services offered.

darryll k. jones


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A neglected line of inquiry about fiscal sponsorship is the public policy implications and the opportunities for abuse. I see some government departments making grants to fiscally sponsored nonprofits because that way they (the govt agency) still controls all the money and runs the programs, but they also sidestep public sector unions (on one side) and an authentic nonprofit board (on the other).

In addition, there are hundreds of university professors who establish a fiscally sponsored nonprofit that allows them to get money from the same government or university that is already paying 100% of their salary. By being the principal investigator (for example) under fiscal sponsorship, they can double or triple bill for their salary and be accountable to no one.

Finally there is virtually no transparency for nonprofits that are operating under fiscal sponsorship. In a fiscal sponsor with tens or hundreds of millions of dollars in income, it's impossible to know how much a particular project got, how much they spent, how much they are paying their folks.

And now that more and more donor-advised fund entities are also offering fiscal sponsorship, and more fiscal sponsors are offering donor-advised fund management, the combination is turning into a completely opaque black box. I can give $5 million to DAF A and get a tax deduction, and then have it give money to fiscally sponsored project B in the same institution, have that Project B hire my children at extremely high salaries for doing nothing, and it's all invisible.

Fiscal sponsorship is good vehicle. But the proponents and cheerleaders for fiscal sponsorship are closing their eyes to the many and very large ways that fiscal sponsorship is also enabling and hiding unethical and sometimes illegal behavior.

Posted by: Jan Masaoka | Nov 28, 2023 3:29:22 PM

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