Thinking About Fiscal Sponsorship: Purpose and Politics

Thinking About Fiscal Sponsorship (full series)
Purpose and Politics | Pop Ups and Perpetuity
The Form 990 Black Hole | Potential Reforms

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Summary: Fiscal sponsorship is an arrangement through which a group that does not have its own tax-exempt status from the IRS can operate as a “project” of a nonprofit that does. It offers several advantages for smaller or newer organizations, allowing them to pursue their tax-exempt mission in ways they might not otherwise be able to. At the same time, there are virtually no public disclosure requirements for fiscal sponsorships. Particularly with respect to those projects that are active on political or public policy issues, fiscal sponsorship could be considered a form of “dark money.” Fiscal sponsorship reform should initially focus on enhancing transparency, which would likely involve updates to IRS Form 990.

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Fiscal sponsorship is a convenient way for new and/or small groups to reduce the time and expense required to begin pursuing their tax-exempt mission, as well as to lessen administrative burdens that they may be ill-equipped to handle on their own. Operating as a “project” of an established nonprofit is an arrangement that can make sense for many such organizations.

On the surface, fiscally sponsored projects can look and act just like independent nonprofits. Some weigh in on controversial sociopolitical issues and affect associated public policy debates. Unlike standalone nonprofits, however, fiscally sponsored projects are subject to virtually no transparency requirements to offset the tax advantages they enjoy. Fiscal sponsorship reform should focus on enhancing public disclosures without meaningfully restricting the practice, which is of significant value to the tax-exempt sector.

Purpose and Politics

Fiscal sponsorship is an arrangement through which a group that does not have its own tax-exempt status from the IRS can operate as a “project” of a nonprofit that does, such as a 501(c)(3) charity or a 501(c)(4) social welfare organization. Fiscal sponsorships are increasingly common, in part because they can provide significant advantages for smaller or newer groups that wish to operate for a tax-exempt purpose. The process of becoming fiscally sponsored is faster and cheaper than applying for tax-exempt status, and the sponsoring nonprofit provides valuable administrative and financial management support to the project. By operating under the umbrella of an established nonprofit, projects can also receive grants from foundations and other major institutional grantmakers. In the case of 501(c)(3) fiscal sponsorships, donations to the project are tax-deductible.

The fiscal sponsor is responsible for exercising a degree of oversight and control over the project to ensure that it is operating properly and in accordance with its tax-exempt purpose. Any contributions or grants made to the project are technically made to the fiscal sponsor, which earmarks and disburses the money for the project’s activities. Fiscal sponsors generally charge a fee for their services, which commonly ranges between 5 and 10 percent of the project’s revenue. The contractual nature of the relationship means that the specifics of any given fiscal sponsorship can vary, though there are two primary models. Model A fiscal sponsorships provide more comprehensive support and management, while Model C fiscal sponsorships focus largely on grant administration. These designations originate from the book Fiscal Sponsorship: 6 Ways to Do it Right by Gregory Colvin, which is considered a seminal work on the topic.

Many sources date the first fiscal sponsorship to 1959, established by the nonprofit now known as TSNE (then known as Massachusetts Health Research Institute and later as Third Sector New England), which continues to sponsor dozens of projects today. There are currently hundreds or perhaps thousands of active fiscal sponsors in the United States. As of 2024, the national Fiscal Sponsor Directory maintained by the San Francisco Study Center contains 376 fiscal sponsors that collectively house 20,566 projects. Notably, just 33 large fiscal sponsors account for two-thirds of all projects in the directory, and approximately 4,000 projects (exclusively of the Model C variety) are housed at the nonprofit Fractured Atlas alone.

Most fiscal sponsors will only accept projects that align with their own mission, and one of the early groups to apply an ideological lens to this evaluation was the Tides Foundation. Today, it exists as part of a nexus of related Tides entities that form one of the largest and most important left-of-center funding and fiscal sponsorship networks in the United States. The combined revenues of the various Tides nonprofits in 2022 were just under $1 billion.

The Tides Foundation was established in 1976 by Drummond Pike, who at the time was serving as executive director of the Shalan Foundation. It took on its first fiscally sponsored project in 1977. A few years later, in the shadow of Ronald Reagan’s landslide victory in the 1980 presidential election, left-wing Hollywood activist Norman Lear set up People for the American Way as a Tides Foundation project. It would later spin off as an independent nonprofit and become notorious for its successful attacks on conservative Supreme Court nominee Robert Bork in 1987. The Tides Foundation itself became independent in 1981, and in 1989 it internally separated its grantmaking activities from its fiscal sponsorship program. In 1996, it transferred its fiscal sponsorship program to a new affiliated 501(c)(3) charity called the Tides Center.

According to a history published by the group in 2001, Tides housed approximately 50 fiscally sponsored projects in 1988, which had grown to 350 by 2000. As of 2024, the Tides Center—which offers comprehensive Model A fiscal sponsorships for a fee that ranges from 6 to 9 percent of the project’s revenue—claims to house at least 130 projects. The Tides Foundation separately offers the more limited Model C sponsorship option, for which it charges a 5 percent fee. The affiliated Tides Advocacy also claims to have “a network of over 90 fiscally sponsored 501(c)(4) projects and funds,” which are legally permitted to engage in more explicitly political activities.

Today, Tides is well-known for sponsoring numerous activist groups that stake out left-of-center positions on controversial sociopolitical issues. Examples include Fair and Just Prosecution, a Tides Center project that supports a soft-on-crime justice system; The Lawyering Project, a Tides Center project that opposes abortion restrictions; and Voices for Progress, a Tides Advocacy project that is active on virtually the entire spectrum of left-progressive issues. Flip the Vote is a Tides Advocacy that claims to have raised over $18 million since 2020 and whose goal for 2024 was “to win Democratic control of all three branches of the federal government while simultaneously guarding against the worst-case scenario of unified GOP control.”

Some Tides projects espouse deeply radical beliefs. Dream Defenders, whose 501(c)(3) arm is sponsored by the Tides Center and whose 501(c)(4) arm is sponsored by Tides Advocacy, describes itself as a “revolutionary” organization that wants to replace what it calls the “capitalist police state” with a “liberatory socialist vision for the country and the world.” According to the group’s manifesto, this would entail “a world without prisons, policing, surveillance and punishment.” Dream Defenders was one of a least five different Tides projects that endorsed the Socialism 2024 conference held in Chicago, which featured sessions with titles such as “Lenin and the Politics of Rehearsal,” “What is Gay Communism?,” and “We Lie to Cops: Lessons from Incarcerated Radicals.”

Dream Defenders also featured prominently in the Capital Research Center’s recent report Marching Toward Violence: The Domestic Anti-Israeli Protest Movement. It was one of six different groups profiled in the report that were fiscally sponsored by either the Tides Center or Tides Advocacy. In fact, over two dozen of the 150+ listed groups operated under a fiscal sponsorship arrangement. At least three were sponsored by the Alliance for Global Justice—including Samidoun, which was recently sanctioned by the governments of the United States and Canada as “a sham charity that serves as an international fundraiser for the Popular Front for the Liberation of Palestine (PFLP) terrorist organization.” Several others were sponsored by the WESPAC Foundation, including Students for Justice in Palestine, which the report described as the group “most responsible by far for the current anti-Israel protest movement.”

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In the next installment, many nonprofit organizations “pop up” as fiscally sponsored projects of an established nonprofit.

Source: https://capitalresearch.org/article/thinking-about-fiscal-sponsorship-part-1/