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Fiscal Sponsorship, A Good Alternative for Charitable Athletes

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Within the sports community, donor advised funds (DAFs) have increasingly been recognized as preferred alternatives to establishing independent charities or foundations. The sports community is much less aware of fiscally sponsored projects, another alternative charitable vehicle that provides more flexibility than donor advised funds and more closely mirrors the infrastructure of an independent public charity.

Although most athlete DAFs are funded by a combination of donations from the athlete and the public, DAFs were originally conceived as an alternative to private foundations, meaning that they would be funded by one or more persons within the same family---not the public. For that reason, DAFs were primarily intended to be grant making vehicles and have significant restrictions on the type of distributions allowed. The intention was that a donor, or a family of donors, would make charitable contributions to a donor advised fund, receive an immediate tax-deduction, and recommend grants from the fund over time, which is very similar to a private foundation's structure.

As with any charitable contribution, once the donation is made to a DAF, the charity, and not the donor, has irrevocable legal control.

Sponsored projects were conceived as an alternative to establishing a public charity, often with the intent to incubate an active charitable project until it was prepared to file for its own 501(c)(3) and become an independent charity.  

The services that sponsoring organizations provide for fiscally sponsored projects vary widely. Some sponsoring organizations allow a project to have dedicated staff that is paid from the project, provide HR benefits to those employees, and allow reimbursements of expenses from the project’s assets to an individual---all activities that are not legally allowed in donor advised funds. Most significantly, unlike many donor advised funds, sponsored projects are encouraged and expected to actively fundraise from the public.

Sponsored projects may be a preferred choice when one or more of the following applies:

  1. The project wants to hire employees to work on the day-to-day implementation of the charitable program or project.
  2. The project requires frequent expenditures for fundraising or program activity.
  3. The project expects to establish its own 501(c)(3) organization at some point in the future and wants to be trained in governance and management issues.
  4. The project was started by a group of supporters, or would like to engage a group of supporters,  who want to be involved in strategy, fundraising, and programming. 
  5. Donors do not expect advisory privileges and are prepared to have the
    Project Committee serve in a similar capacity to a Board of Directors. 
    See The Role of the Project Committee for more details.

Below are some of the differences between DAFs and sponsored projects that are most relevant to the sports community.  You can also see it in a table format by clicking here.

A few nonprofit organizations have been established to provide more robust donor advised
fund services to professional athletes.  An athlete and his advisors should verify that a sponsoring organization knows the guidelines for both so that they do not run afoul of the IRS.

Differences Between Donor Advised Funds and Fiscal Sponsorship (Model A)

Not every sponsoring organization provides every service listed. Several type of fiscal sponsorship exists. These bullets reference only the most commonly offered Model A fiscal sponsorship.

Donor Advised Funds

  • Cannot distribute assets to individuals so employees cannot be hired and paid
    from the assets. Some DAFs will allow payment to consultants who have
    incorporated companies.
  • Cannot reimburse expenses to individuals even if the reimbursements are valid charitable expense.  The IRS still considers this a distribution to an individual so it is
    not allowed.  The individual may be able to claim a personal tax-deduction for these expenses.
  • Donors make recommendation as to where the funds are distributed but the sponsoring organization has legal control over the assets.
  • Do not usual allow complex projects under a DAF structure.   Mainly used to distribute grants.
  • Virtually eliminate most of the red tape and governance responsibilities around establishing an eponymous charitable vehicle.
  • Most will not allow special event fundraising expenses paid from DAFs and will only accept the net assets from a special event, which means participants do not receive any tax-deduction. If special events are allowed, only incorporated companies may be paid for services rendered. No payments can be made to individuals.

Fiscal Sponsorship

  • Can pay employees and health benefits from assets in the project.
  • Can reimburse valid charitable expenses to individuals with proper receipts and invoices.
  • The project committee advises the sponsoring organization on the activity for the project. The sponsoring organization has legal control over the assets.
  • Were designed to provide infrastructure for active charitable projects.
  • Naming a fund after the donor may tip the project into being legally defined as a DAF. Seek professional advice.
  • Fundraising is anticipated and encouraged, including special event fundraising. 
    Projects accept donations related to fundraising and so participants receive a tax-deduction to the fullest extent of the law. Both individuals and corporations can be paid from the project’s assets.

Remember: If a fund meets the three-pronged definition of a donor advised fund, (see definition below), it is a donor advised fund, even if the donor’s preference is to become a sponsored project. If the fund fails to meet any one of the three prongs of the definition, it is not a DAF.  Other exceptions can also apply so it is important to consult with an expert.  No legal definition for fiscal sponsorship currently exists.

Three-Pronged Legal Definition of Donor Advised Fund

A fund or account that meets all three parts of the following definition:

  1. Separately identified by reference to contributions of a donor or donors,
  2. Owned and controlled by a sponsoring organization, and
  3. A donor, or any person appointed or designated by such donor, has or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund or account
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