Model C Fiscal Sponsorship and Filmmaking
I was fortunate to present at Fiscal Sponsor Conversations this past week on Model C fiscal sponsorship as applied to filmmaking (and to present there this coming week on how the proposed DAF regulations affect fiscal sponsors). If you’re not familiar with this group and are engaged or interested in fiscal sponsorship, I can give it my strongest recommendation. Fun group, interesting speakers, and, at least when I’m not there, a great rotating cast of presenters. Andrew Schulman of Schulman Consulting and Oliver Hack of Social Good Fund do a great job creating an engaging atmosphere.
Because the topic is something I find interesting and think about often, I thought I’d share my (a bit rudimentary) slides from this presentation and a few random thoughts on filmmaking as a charitable activity, when it feels safe, and when it is pushing the boundaries of how the charitable sector is supposed to operate.
Random Thoughts on Filmmaking:
Making films is not automatically a charitable activity. In general, the creation of artistic content is not an exempt activity unless some other 501(c)(3) purpose is advanced. Teaching someone about painting is a charitable activity. Paying someone to just make a painting is not unless there is a larger plan for how that painting is going to be used to educate or if the payment to the creator independently advances a charitable purpose (e.g., the proverbial starving artist).
While there may be other ways to fit some films into 501(c)(3), the most common approach is to fit into the “educational” bucket. 501(c)(3) includes educational activity, which includes both improving the skills of an individual (commissioning films as part of a film class?) or educating the general public on topics on subjects useful to the individual and beneficial to the community. But even then it is more than just making something educational… it is about how you distribute it.
For the past sixty years in its intermittent rulings on films and other media distribution, the IRS keeps going back to the same 4-prong test in Revenue Ruling 67-4. Sparing you the quotes, let’s just say that the first 3 prongs are all about “Are you trying to make a thing that is educational? Is that what motivates the production of your work, as opposed to it being a means for profit?”
The majority, maybe even the vast majority, of film projects I run into in the charitable sector find a way to meet this part of the test. While I occasionally run into people trying to use charitable dollars to support films of a purely commercial nature, people are usually coming with ideas for documentaries about something they care about of value to the public (i.e., not a Bravo reality show) and others might too (i.e. not a film about their vacation to Fort Worth). While I do think the case for fictional films can be somewhat harder, more often than not the proposals I see are attempts to communicate ideas and express a point of view to the public that I could argue is educational or otherwise charitable. And if that were all it took, I’d probably spend less time thinking about filmmaking as a charitable activity.
The fourth and trickiest prong of the test is “Do you distribute your educational product in a manner distinguishable from ordinary commercial publishing practices?” You might think the goal is just to get as many eyeballs on your educational film as possible. And maybe that should be the answer. But the IRS does not appear to agree. In the past, the IRS has rejected publishing that incorporates advertising or that airs in standard commercial environment (e.g. advertising-supported network broadcast), even if that might mean that more people are seeing it. The test in this area so often boils down to “Are you actually doing something different than what a for-profit media producer would do?” In the past, the market for documentaries was more clearly distinguishable from the market for clearly non-charitable films — if they got distribution at all, it was at independent theaters or PBS, and it was easy to mark them as separate from Hollywood fare. But, while there are certainly more noncommercial platforms, many charitably-funded documentaries all end up in the same place: Netflix, Hulu, HBO, YouTube, etc. We certainly do not have any ruling that it is definitely not OK, and I generally do not advise clients to avoid these altogether, but there needs to be something extra. Something that shows an effort to disseminate the educational message in a way that surrenders profit for impact. And to steer clear from paid advertising when and if you can.
As a result, our advice is almost always some version of “Even if you use the dominant methods of distribution for your film (if you’re lucky and a streaming service buys it up), you need to find a way to get it out there on other ways that go beyond what someone just trying to make as much as money would do. Film festivals, partnerships with schools and other educational nonprofits, community events, creating educational curriculum around the film, etc. There’s no easy answer, but the less you look like a member of the film industry the better.” Always hard to apply these subjective tests, but generally charities that show a good faith effort to try and make it look and feel different will be in a better place than the ones that do not.
What Makes Model C Support of Filmmaking Empowering From a Filmmaker Perspective and Challenging from a Legal Perspective
Model C Fiscal Sponsorship can be great because it provides a mechanism for a project to take true ownership of their charitable work. In this version of fiscal sponsorship, the fiscal sponsor receives donations for particular charitable purposes and plans (but is not required) to re-grant those funds to a particular third party that is carrying out a project in line with those purposes. The sub-grantee enters into a contractual agreement to only use the funds for charitable purposes, to report to the sponsor, and to repay the money if it is spent improperly. The sub-grantee can only use those funds for a charitable activity, but they are the legal owner of the funds once the sponsor grants them over and can have day-to-day control over how it is spent. When done correctly, it empowers small projects with their own entities to take ownership of the charitable activity and lets the fiscal sponsor stand back in the role of grantmaker (a less time and liability-intensive role than being the sponsor that owns and controls all activity). When Model C fiscal sponsorship done incorrectly, charitable funds are diverted from the charitable sector without sufficient assure they will be used properly, and donors and grantmakers are at risk of not getting the desired results or violating the laws that apply to them — but let’s stay positive and assume the Model C fiscal sponsor is doing everything right here.
In the film context, Model C fiscal sponsorship looks something like: Filmmaker approaches the sponsor with a specific idea for a documentary about the rainforest, establishes project and Sponsor agrees to accept money for “Educating public about the rainforest through film” (i.e., not for “[Name of Film] being created by [Name of Filmmaker]” — that information can be there as illustrative, but it’s not supposed to be a promise that it will go to them specifically). Sponsor receives money from the public, and, as long as no issues arise, re-grants it to filmmaker’s production company in exchange for a commitment to use the film in a charitable manner and maybe some other provisions too (more below). Filmmaker creates and owns the film and follows the distribution plan that the sponsor decided was sufficiently charitable.
Let’s assume you can get over that first hurdle of not earmarking for a particular filmmaker (easier said than done — fiscal sponsorship is always about needing to trust the fiscal sponsor with control, but the donors and the filmmakers all tend to be very interested in a particular filmmaker being required to do the film.). The next biggest stress in Model C fiscal sponsorship is the private benefit/charitable asset problem. By that I mean: “Generally speaking, charitable dollars need to stay in the charitable sector. If the funds leave the charitable sector (e.g. a grant to a film production company or filmmaker), they need to be spent on charitable purposes. People may benefit from how those funds are spent (e.g. they may be paid by a salary to do the charitable activity), but we need to avoid that benefit being ‘excessive’.
And generally when a charity spends its money to create a capital asset, the charity is the owner of that asset. If a charity wants to support the creation of a museum through grants, some of that money may go to the architect that builds it, but it’s not like the architect ends up owning the building. If a charity is going to fund something like that, it typically needs to ensure that the owner is a charity or a government entity. This often makes Model C a “bad fit” when capital assets are involved — if the grant money is not being spent down, but instead converted to another asset, how do we make sure that we haven’t just taken money out of the charitable sector?
But when it comes to filmmaking, the filmmaker is expecting to own their creation. Whether that feels right or wrong to you may depend on the circumstances. Did the filmmaker put up 90% of the budget and get 10% of the support through a fiscal sponorship? Maybe that seems fine if the nonprofit was able to help make the documentary happen and secure some noncommercial distribution. But what if the fiscal sponsor put up 100% of the budget? Is it right for the filmmaker to own the film and all of the profits from it when charitable dollars were used to create it? How is that different from the architect owning the museum building?
One answer might be: “Well, these films we are talking about are worth a whole lot less than a building. In fact, most of them probably do not have much economic “value” at all. Letting the filmmaker be the owner of the film is important to them from a creative perspective, and the actual economic benefit is probably minimal. So maybe a fiscal sponsor could live with the risk here of making grants to a filmmaker to create a film they own, even if we wouldn’t make grants to an architect to build a building that they own.”
It is definitely true that the vast majority of charitably-funded films are not worth as much as a building, and maybe not even as much as a used car. But the market has shifted enough that there a meaningful number of charity funded films that are worth something. Especially when the filmmakers involved are established names or a distribution deal is reached with an established company. Can fiscal sponsors just ignore that they are taking charitable dollars and using them to create an asset that someone else owns??
It is a really tough question, but I think the short answer is that fiscal sponsors need to do something to manage this risk.
Maybe that is by focusing on the right type of filmmaker. Perhaps if you’re working with totally undiscovered filmmakers making their first project, you might take the calculated risk of saying the chances of any of these having actual “market value” is so low we do not have to worry about this. Even in that situation, I’d keep an eye out for situations where it feels like a giveaway of real value, but it’s fair to say that working with film students or first-time filmmakers probably carries a low risk of looking bad in retrospect.
But what about when an established documentarian comes to your sponsor and says “X foundation wants to put up $100k to fund this film, they’ll give it to you, you give it to me, I’ll own the film, and I’ll keep the proceeds of the distribution deal, in addition to being paid to make the film.” Is the fiscal sponsor being used improperly in that situation? What if it’s $500k grant? What if there is a distribution deal about to be signed that assures the film owner a profit?”
In those situations, I would suggest considering a shift from pure grant funding to a program-related investment of one kind or another (a SAFE, a simple equity investment, a profit-sharing arrangement, a loan) or a recoverable grant (e.g. it’s a grant, but if X, Y, or Z happens, it becomes a loan to be paid back to be redeployed by the fiscal sponsor to other projects). If the documentary turns into nothing commercial, that’s fine — the charity has supported the creation of the work and the filmmaker owns the film, but it’s not a major economic benefit. In those situations where the documentary is something commercial, the funds come back into the charitable sector to fund the next project. That’s not a natural fit for most Model C fiscal sponsors (typically they just make grants, not investments and may not have an obvious mechanism for re-spending the money when it comes back), but I have seen situations where I believe these structures can help prevent the charity from being “used” by noncharities.
Another situation is to find another way to “buy charitability”. Maybe you’re not going to own the asset, but the sponsor could require the grantee to provide a license back to the sponsor to ensure that the charitable sector retains a right to distribute and use the film for charitable and educational purposes. Distributors may not be a fan of those licenses, but remember: charitably funded films are supposed to be different than your average film project. That may mean finding a way to lock in the right to do that noncommercial distribution.
No easy answers, but that’s part of what makes this activity fun to think about. Hopefully, fiscal sponsors continue to support film work and help find ways to make sure that the charitable dollars used to fund them are spent impactfully.
