Fiscal Sponsorship and the Proposed DAF Regulations: How Big a Problem Do We Have?
Another really enjoyable time a couple of days ago with Fiscal Sponsor Conversations, this time talking about how fiscal sponsorship could be impacted by the Proposed DAF Regulations (which we wrote about earlier as it relates to other issues). I am sharing the slides here. Probably impossible to explain DAFs, what the proposed regulations are and mean, and what that has to do with fiscal sponsorship in a single presentation or blog post. But the exercise helped me boil down what my recommendations are for fiscal sponsors to manage this risk.
If you want a deep dive into the regulations, check out our earlier post or slides. If you want to skip to the back of the book, let’s go through what my current takeaways are (none of the below is legal advice, of course, just the rambling of someone who spent too much time putting together slides)…
DAFs and Fiscal Sponsorship Do Have Some Things in Common: Both involve a situation where a charity (the DAF sponsor or the fiscal sponsor) receives money with the understanding about how it will be spent, but that is legally vested with control over the funds. In both cases, there is a “leap of faith”. With a DAF, the donor says “charity, take all of this money and, we can’t require it, but I certainly hope that my advice is the only thing you listen to in terms of how to spend it.” With a fiscal sponsor, the project says “charity, take all the money we raise for this project, and we can’t require it, but we certainly hope that you only ever spend this money in the way that we want to spend it.” It’s not outlandish that fiscally sponsored projects are getting caught up in net that the Treasury is using to regulate DAFs.
The Goal is Not to be a Donor-Advised Fund (DAF): Historically, fiscal sponsors have primarily just been worried about getting money FROM DAFs, which is easy. Now they are worried about being classified AS A DAF, which would be hard. DAFs have lots of rules — no grants to individuals, no improper benefits, etc.. And, now more than ever, DAFs are a terrible (perhaps impossible) fit for operating projects (projects that hire people to do things, instead of just invest and make grants like your average DAF). Goal #1: find a way to be comfortable that it’s not a DAF.
Achieving that Goal is Harder the More You Are “Donor-Facing” Instead of “Operations-Facing”. Many of us assumed that fiscal sponsorship did not have to worry about being DAF classifications because they do not center donors. The platonic ideal of fiscal sponsorship is a grassroots project without an entity identifies a sponsor that believes in what they’re doing and can make it easy for the project to operate under their umbrella. In those situations, we don’t have “donor-advisors” because the fiscal sponsor picks the project manager that advises how the project is operating. The donor comes in after the relationship is already established
With some notes below, if you are one of those sponsors that does not center the donors, I would still argue that you should not have much to worry about (but more below)
But, if you are a fiscal sponsor that DOES center your donors in terms of letting them set up the project and pick the managers, then you DO have a risk of being a DAF. Most of the arguments we used to make about why these fiscally sponsored projects are not DAFs have largely been tossed out the window.
With How These Proposed Regulations Are Written, Even if Your Donors do Not Establish the Project or Explicitly Project Managers, You’re Not Totally Off the Hook: Hat-tip to Gene Takagi for calling this out to me and writing about in his blog post on the topic, but there is one example that is so broad that if the Treasury doesn’t fix it before they finalize these regulations, so many restricted funds become DAFs:
Example 10. N, an individual, establishes Fund O at W, a sponsoring organization. Fund O serves as a memorial to N’s daughter, and receives many contributions from unrelated individuals. N is the only person with advisory privileges and thus is a donor advisor. Fund O is a donor advised fund.
What’s missing from that example? The donor doing anything to pick who is the advisor to the fund. And apparently that is intentional because the preamble describes this as a situation where the donor has “implicitly designated the donor” to have advisory privileges. But if a fund having an advisor, regardless of whether the donor actually picked them, is enough to make that a donor-designated advisor, then isn’t almost every fiscally sponsored project a DAF?
For me, this is in the category of “well that just can’t be right…” but that’s the sort of logic that is not very helpful to hear from your lawyer. I am cautiously optimistic that maybe we’ll get something in the final regulations clarifying this a bit. But we will see….
We May Be Waiting a While for Final Regulations But There is Some Stuff Fiscal Sponsors Can Do Now to Feel Safer. These Proposed Regulations could snap into place at any time, though it’ll probably be a while. And they do represent how Treasury thinks about the rules that are already in place. So, it’s worthwhile to start doing something to manage your risk as a fiscal sponsor. Here are some rough ideas:
If You’re a Non-Donor-Facing FSP, Can You Avoid Being “Separately Identified” By Reference to Donor or Donors? As you’ll see in the slides, this is part of the definition of a DAF. If you had asked me what I thought that meant, I would have said something like “ Well, I think “separately identified” means it looks or feels like a DAF — the project fund is not necessarily about a particular purpose area, it’s about who gave money to it. That is not the case for most fiscally sponsored projects, so most fiscally sponsored projects.” I think that is good logic, unfortunately the Treasury doesn’t care what I think, because their definition says that any fund that keeps a formal record for a fund of donor contributions is “separately identified” — which, seems like every restricted fund in the world that is doing a better-than-terrible job of keeping track of their resources. Still, if you do have a fiscally sponsored project that is able to track its fund balance without separately accounting for the balances of different donor contributions and that does not otherwise maintain a formal record of who gave what to this particular fund, and you otherwise steer clear of acting like a DAF, maybe you can use that as an argument that you’re off the hook.
Can You Make Sure Your Project Manager/Project Committee Members are Employees? Perhaps this is solving one problem by creating another, but there is an exception for nonprofit employees. And, at least in Model A, it is not uncommon for the project manager to be an employee. In that situation, if that project manager is the only advisor, then we have a good argument it’s not a DAF.
Committee Exceptions. If you have a Project Committee, consider whether you can fit that committee into one of two exceptions provided by the regulations. Diving all the way into them would make this too long of a blog post, but the short answer is that any donor-representative should be no more than one-third of the committee, not be related to the donor, and not be the donor themselves. They must also be picked based on objective criteria (e.g. expertise in the work being conducted).
Do Your Best to Have Your Projects Predate Your Donors. While the regulatory language isn’t perfect, it does seem like the right answer SHOULD be that if you pick your projects and the people running them without input from the project’s donors, there shouldn’t be a good argument that you’re a DAF. Hopefully they fix the regulatory langauge to make that more true, but I think it’s still an argument worth making and an approach worth taking.
Incorporate Into Your Gift Agreements and Receipts Some Language to Promote Non-DAF Treatment. Many fiscal sponsorship agreements already get the project to agree that they are “Not a DAF” — that helps, but only so much. What if we go one step further and get the DONOR to agree that neither they nor any donor-advisor has any advisory privilege as a result of the gift? Ideally, that’s in the gift agreement if you have one; but if not, what about including something in the receipt like:
“Thanks for your gift of $_____________ on [Date] to [Name of Sponsor] for the purposes of the [Name of Project]. No goods or services were provided in exchange for this contribution. Furthermore, we are confirming that this gift does not create any “advisory privilege”, either for you or anyone designated by you, and our restricted fund for the [Name of Project] is not a “donor-advised fund”, as those terms are used in Internal Revenue Code Section 4966. Please note that [Name of Sponsor] retains exclusive legal control over all contributed fund.”
In a perfect world, we can get that language in a gift agreement or on your “donate page” (“By making this contribution, you agree that this gift does not create any…”), so the donor agrees to it. But dropping in a receipt is putting them on notice. And the last sentence is what is required if you did have a DAF, and is frankly a good practice for fiscal sponsors to include (because it’s true).
For Model C Fiscal Sponsorships That You Are Worried Might be DAFs, Include Expenditure Responsibility Provisions in Your Grant Agreements. In some ways, Model C (grantmaking) fiscal sponsorships are easier because DAFs are actually good at DAFs. But they do need to be “expenditure responsibility” grants, which means a pre-grant inquiry on the grantee, reporting, and prohibitions on the grant agreement to do anything non-charitable. All of those things are what Model C sponsors should be doing anyway (though this would require them to prohibit lobbying, which I would not have advised previously), so it’s not that heavy of a lift.
For All Fiscal Sponsorships That You Are Worried About Being DAFs, Avoid Transactions with Donors or Persons Related to the Donors or the Advisors. The rules around DAFs engaging in transactions with or providing benefits to donor-advisors is very strict. So if you have something you are worried about is a DAF (e.g., because it is very donor-facing), this is probably where you need to be extra careful around those relationships.
For All Fiscal Sponorships That You Are Worried Might Be DAFs, Avoid Grants to Individuals (Or Structure Them as Scholarship or Disaster Relief Funds). DAFs can’t make grants to individuals, so if you think have a DAF, you either need to limit your grants to organizations or try to fit them into a scholarship committee or disaster relief committee exception.
This is a lot of information — all of it somewhat speculative about how the IRS might apply the rules in practice to be fiscal sponsors (to the extent they even think about fiscal sponsors at all) — but hopefully somewhere in here in something that could help fiscal sponsors feel a bit better about a very confusing area.
