Prepare Your Own 501(c)(3) Application
By Sandy Deja © 2016 400 pages ISBN 978-0-9815280-9-0
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(available in pdf as well; send email request)
In Revenue Ruling 68-489, the IRS held that a 501(c)(3) organization can distribute part of its funds to organizations which have not, themselves, received IRS recognition of (c)(3) status, if they take certain steps to insure that the funds are used only for charitable, educational, etc. purposes.
Only a few guidelines are specifically 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
Prepare Your Own 501(c)(3) Application includes a Fiscal Sponsorship Checklist
Based on this ruling, many 501(c)(3) organizations throughout the country have sponsored other, non-exempt (or not yet exempt), organizations or projects. These arrangements have been called by many names -
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, where IRS guidance is quite limited. Although many small/newly formed non-profit organizations could not exist without sponsorship of this kind, I do not recommend relying on a fiscal agent arrangement 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 sponsorship arrangement to be a strategy to circumvent the law, no more than a conduit or pass through arrangement, every party involved - the non-profit sponsor, the non-exempt organization, and the donor - could end up with tax troubles.
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Form 1023 Paperwork, In Millions of Hours, 1986 to 2016
Source: U.S. Office of Management and Budget. Click image to learn more.
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