We’re often asked if the IRS allows for-profit companies to be fiscally sponsored. The short answer is: “Yes, under certain conditions.” The slightly longer answer is that the IRS allows a 501(c)(3) nonprofit to fiscally sponsor specific activities carried out even by a for-profit entity, provided that they are sufficiently charitable in nature and align with the 501(c)(3) nonprofit’s charitable mission.
Our fiscal sponsorship program is a so-called Model C one (no, not the old Ford automobile model). This is a specific arrangement in which a tax-exempt organization (the fiscal sponsor) enters into a grantor-grantee relationship with an independent project or entity. Unlike other models of fiscal sponsorship, Model C does not involve the fiscal sponsor assuming legal or financial responsibility for the project. Instead, the project operates as a separate entity, often with its own legal structure, while receiving funding and support from the fiscal sponsor.
This post outlines the legal framework for Model C fiscal sponsorship, including IRS guidelines, relevant case law, and expert opinions from Adler & Colvin.
What Is Model C Fiscal Sponsorship?
In a Model C arrangement, the fiscal sponsor acts as a grantor, providing funding to the project (the grantee) to carry out activities that align with the sponsor’s charitable mission. The key characteristics of Model C fiscal sponsorship include:
- Independent Legal Entity: The sponsored project is a separate legal entity, such as a for-profit or nonprofit organization.
- Grantor-Grantee Relationship: The fiscal sponsor provides grants to the project, subject to the terms of a written agreement.
- Charitable Purpose: The project must serve a charitable purpose that aligns with the fiscal sponsor’s tax-exempt mission.
- Control and Oversight: The fiscal sponsor must exercise “discretion and control” over the use of funds to ensure compliance with IRS regulations.
IRS Guidelines on Model C Fiscal Sponsorship
The Internal Revenue Service (IRS) has not issued specific guidance on Model C fiscal sponsorship, but general principles for tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code apply. Key considerations include:
- Charitable Purpose: The fiscal sponsor must ensure that the project serves a bona fide charitable purpose.
- Control Over Funds: The fiscal sponsor must retain discretion and control over the use of funds to ensure they are used exclusively for charitable purposes.
- Avoidance of Private Benefit: The arrangement must not result in impermissible private benefit or inurement to the project or its stakeholders.
For more information, refer to the IRS guidelines on tax-exempt organizations: IRS Exempt Organizations Guidelines.
Relevant Case Law and Precedents
Several legal precedents provide insight into the requirements and risks associated with fiscal sponsorship arrangements:
- Revenue Ruling 68-489: This ruling emphasizes the importance of the fiscal sponsor retaining control and discretion over the use of funds.
- Automobile Club of Michigan v. Commissioner, 353 U.S. 180: The Supreme Court held that the IRS has broad discretion to revoke tax-exempt status if an organization operates in a manner inconsistent with its exempt purpose.
- Variety Club Tent No. 6 Charities, Inc. v. Commissioner, 74 T.C.M. 1485: The court upheld the IRS’s revocation of tax-exempt status due to material changes in operations that resulted in private benefit.
These cases highlight the importance of structuring Model C arrangements to comply with IRS regulations and avoid risks of private benefit or inurement.
Adler & Colvin’s Analysis of Model C Fiscal Sponsorship
Adler & Colvin, a leading law firm specializing in nonprofit law, has published detailed analyses of fiscal sponsorship models, including Model C. According to their guidance:
- Written Agreement: A clear, written agreement is essential to define the roles and responsibilities of the fiscal sponsor and the project.
- Grant Terms: The agreement should specify the terms of the grant, including reporting requirements and restrictions on the use of funds.
- Oversight: The fiscal sponsor must monitor the project’s activities to ensure compliance with the grant terms and the sponsor’s charitable mission.
For more information, visit Adler & Colvin’s resources on fiscal sponsorship: Adler & Colvin Fiscal Sponsorship Resources.
Risks and Compliance Considerations
While Model C fiscal sponsorship offers flexibility, it also carries risks that must be carefully managed:
- IRS Scrutiny: The IRS may scrutinize arrangements involving for-profit entities to ensure compliance with tax-exempt requirements.
- Reputational Risks: Public perception of the fiscal sponsor’s commitment to its charitable mission may be affected if the arrangement is not clearly understood.
Conclusion
Model C fiscal sponsorship is a viable option for supporting charitable activities carried out by independent entities, including for-profit organizations. However, these arrangements require careful planning and documentation to ensure compliance with IRS regulations and mitigate risks.
By adhering to IRS guidelines and following expert advice from firms like Adler & Colvin, Realize Impact’s fiscal sponsorship program is designed to successfully navigate the complexities of Model C arrangements while advancing our charitable mission.
Photo credit: “1904 Ford Model C” by Loco Steve, CC BY-SA 2.0.
