Nonprofit Tweets of the Week – October 24, 2014

Global Peace

Erin and I were in Burbank yesterday to to talk governance at a foundation’s board retreat. Have a listen to Amy Adams sing Happy Working Song while perusing our curated nonprofit tweets of the week:


National Network of Fiscal Sponsors – Hot Topic Call: Legal

dog on the phone

Yesterday, I had the pleasure of hosting a Hot Topic Call on legal issues for the National Network of Fiscal Sponsors. If you’re interested in viewing the accompanying slide deck, you can download it by clicking Hot Topics in Comprehensive Fiscal Sponsorship (pdf).


The focus of the call was on comprehensive fiscal sponsorship (also referred to as Model A) and it covered intake, exits, and the existence of a separate entity operated by a project’s leaders. The call also touched on a new model of fiscal sponsorship involving a single member LLC owned by a fiscal sponsor (also referred to as Model L).

In a comprehensive fiscal sponsorship, generally, the fiscal sponsor owns the project and the sponsor is responsible for any project liabilities (including any that the sponsor was unaware of until the project leaders disappeared). Additionally, the sponsor is responsible for how the project fundraises and raises earned revenues. Sufficient due diligence must be exercised at the front end to help assure that the project will further the sponsor’s exempt purpose and not jeopardize the sponsor’s overall operations. And, as an internal project, the sponsor must exercise reasonable oversight over it (e.g., regular financials and program reports prepared by the project leaders at least annually but possibly more often, and combined with site visits and interviews, depending on the circumstances).

Sponsors must be absolutely clear themselves on what comprehensive fiscal sponsorship is if they expect the project leaders to understand it. Sponsors must be particularly careful of marketing too aggressively by promising not to interfere with management of the project; sponsors may have to interfere if there’s a compliance problem.




Nonprofit Tweets of the Week – October 17, 2014

2014-10-14 14.05.00

My week started in Houston speaking at the Grantmakers in the Arts Conference and visiting the awesome dinosaur exhibit at the Museum of Natural Sciences. Have a listen to Was (Not Was)’s Walk the Dinosaur while perusing our curated nonprofit tweets of the week:

  • CompassPoint: What’s your “problem?” Moving past mission statements to a deeper #nonprofit strategy:
  • Foundation Center – San Francisco: Need $$$ for your #arts program or organization? Fiscal sponsorship may be right for you. Find out 10/20 [Ed. I’m looking forward to being on the panel!]
  • Independent Sector: “Why pit charity against strategic philanthropy & systems change? Let’s meld them into a force for good.” — @Diaviv
  • Sandra Feinsmith: 20% of Grant Makers Pay Trustee Fees, Study Finds via @Philanthropy
  • Debra Beck: Lurking, learning w/@BoardSource Leadership Forum backchannel. A few favorite tweets from yesterday #blf2014
  • Debra Beck: Board Leadership Forum: Favorite insights, highlights from day 2 #blf2014
  • Council of Nonprofits: Good Qs for all board members to bring w/ them into the board room, courtesy of @nhnonprofits
  • Nonprofit Quarterly: A scary trend of gov’ts isolating #civilsociety from international #donors & advocacy networks is gaining momentum
  • TIME: Malala Yousafzai: Survivor, activist, Nobel Peace Prize winner.
  • Fast Company Co-Exist: Has microfinance lost its mission?
  • McKinsey on Society: “Case studies, global surveys, + reports offer proof that using business as a force for good is good for business”

Fiscal Sponsorship: A Valuable Option for Grantmakers and Grantees


Yesterday, I had the honor of participating on a panel discussing fiscal sponsorship at the 2014 Grantmakers in the Arts 2014 Conference in Houston. Frances Phillips (Walter and Elise Haas Fund), Melanie Beene (consultant, former CEO of Community Initiatives), and Ian David Moss (Fractured Atlas) were my co-panelists, and we were joined by a very vocal group of attendees who made the session one of my favorites. The following post is from a handout we distributed at the session.

Fiscal sponsorship describes a number of varying contractual relationships that have through custom and practice developed between “sponsors” and “projects,” making it possible for charitable projects to receive grants and deductible contributions without having their own 501(c)(3) status. These relationships can help facilitate grantmakers’ support of worthy arts projects that are not suited for independent legal existence as public charities. But the health of the sponsor and the structure of the fiscal sponsorship agreement are critical to ensuring that your grants are made appropriately and in compliance with applicable laws.

Most common forms of fiscal sponsorship

The two most common models of fiscal sponsorship are referred to as comprehensive (Model A) and the pre-approved grant relationship (Model C). The National Network of Fiscal Sponsors (NNFS) provides the following definitions:


In a Comprehensive Fiscal Sponsorship relationship, the fiscally-sponsored project becomes a program of the fiscal sponsor, and is a fully integrated part of the fiscal sponsor that maintains all legal and fiduciary responsibility for the sponsored project, including its employees and activities. This model of fiscal sponsorship is particularly valuable when a project has employees.

Pre-approved Grant Relationship

In a Pre-Approved Grant Relationship Sponsorship, the fiscally-sponsored project does not become a program belonging to the sponsor, but is a separate entity responsible for managing its own tax reporting and liability issues. In addition, the sponsor does not necessarily maintain ownership of any part of the results of the project’s work—ownership rights may be addressed in the fiscal sponsor agreement and could potentially result in some form of joint ownership. The sponsor simply assures that the project will use the grant funds received to accomplish the ends described in the grant proposal. This is the model of fiscal sponsorship primarily utilized in the arts.

Model A
Model C
Project is housed in sponsorYesNo
Project is housed in separate legal entityNoYes
Project employeesEmployees of the sponsorEmployees of the project (sub-grantee)
SolicitationsBy agents of the sponsorBy agents of the sponsor
GrantsTo sponsor for purposes of the project (housed in sponsor)To sponsor for purposes of the project; sponsor may, but is not required to, regrant to project (sub-grantee)

An alternative to forming an independent charity

Having a charitable project fiscally sponsored by a sound and reputable fiscal sponsor may be an attractive alternative to starting a nonprofit, especially when:

  • An idea is being tested or incubated.
  • The project involves the work(s) of a single artist or collaborative group.
  • The project leaders are inexperienced or otherwise not well prepared to manage the administrative needs of a charity.
  • The project and/or funding is time sensitive.

Tips and traps for grantmakers


  • Carefully vet the fiscal sponsor (your grantee), not just the project leaders.
  • Check the fiscal sponsor’s articles/bylaws (consistency with grant purposes).
  • Check the fiscal sponsor’s financials (e.g., negative unrestricted net assets).
  • Review the fiscal sponsorship agreement (variance powers in Model C).


  • Directing a grant to the project in a Model C fiscal sponsorship.
  • Sending grants to Model A project leaders instead of the fiscal sponsor.
  • Granting to a fiscal sponsor that acts as a mere conduit to another entity.
  • Placing too much weight on overhead (incl. fiscal sponsorship fees).

Nonprofit Tweets of the Week – October 10, 2014


Congratulations to the Nichi Bei Foundation (publisher of the Nichi Bei Times) on its Fifth Anniversary! And many thanks to the board and staff for honoring me with the Fukkatsu (Resurrection) Award. I’ll be in Houston on Monday speaking at the Grantmakers in the Arts Conference. Have a listen to Tighten Up by Archie Bell & the Drells while perusing our curated nonprofit tweets of the week:

  • Gene: Don’t Just Sit on a Board: Stand for Your Mission … @BoardSource @AFJBeBold @buildnpcapacity #BLF14 #advocacy
  • Emily Davis Consulting: Create agenda that inspire critical thinking from board members. #BLF2014
  • Jan Masaoka: CalNonprofits Takes Stands on November Props
  • Rob Reich: Fantastic @raymadoff op-ed in @nytimes: increase foundation payout, pay smaller excise tax. NY Times
  • Foundation Center – SF: Ever wondered about #fiscalsponsorship? We’ve got the inside scoop, from all angles [Ed. I’ll be on the panel - October 20, 1 - 2:30 pm]
  • For Purpose Law: Admit it. You’ve done it. – “Breach of Fiduciary Duty by Ogling the Doughnuts”
  • Bridgespan Group: If you’d like a copy of today’s #mergers & #collaboration presentation #BLF14, find it here:
  • Olive Grove Consulting: When do #nonprofit mergers work? Scott Schaffer from Public Interest Management Group weighs in. PIMG Consulting
  • Gene: Risks in making foundation grants to organizations awaiting their tax exemption Lexology

Fiscal Sponsor Due Diligence

Due Diligence

Fiscal sponsorship describes a relationship between an individual or group who have initiated a charitable project, and an existing tax-exempt organization that has agreed to support said project. In the most common form of fiscal sponsorship, “Model A” or comprehensive fiscal sponsorship, the sponsor brings the project in-house. The project has no separate legal existence and, instead, is owned and operated by the sponsor. The sponsor is vested with control and administration of the project, and project staff are employees or volunteers of the sponsor.

All of the assets of the Model A project are the sponsor’s assets, and, conversely, all of the liabilities associated with the project are the sponsor’s liabilities. Accordingly, the sponsor may be held liable for the actions of a project employee acting within the scope of his or her employment. Similarly, the sponsor may be held responsible to the extent that the project has engaged in any unlawful conduct such as infringing a copyright or violating a restriction described in Section 501(c)(3) of the Internal Revenue Code (IRC). Thus, fiscal sponsors should be careful to ensure that each project is legally compliant and financially viable throughout the relationship.

The following are a few ways a fiscal sponsor can exercise due diligence before and after entering into a Model A fiscal sponsorship relationship:

  • Mission Alignment- A fiscal sponsor’s initial consideration in taking on a project is whether that project’s mission is consistent with the sponsor’s own exempt purposes. As a tax-exempt 501(c)(3) organization, the fiscal sponsor must be operated primarily for a stated charitable purpose. If the project’s activities stray away from the sponsor’s stated purpose, the sponsor may be acting beyond its power and authority (ultra vires). Sponsors should be thorough in questioning the project’s mission, leadership, and planned activities to properly assess whether the two missions are, and will remain, aligned.
  • 501(c)(3) Restrictions and Limitations- While the project is housed within the fiscal sponsor, any project activities are activities of the sponsor. Therefore, the project is subject to the same 501(c)(3) rules and restrictions as its sponsor. A sponsor should vet the project’s leaders to have comfort that they will not engage in any prohibited or restricted activities such as electioneering or substantial lobbying, and will not enter into any transactions that violate the private benefit and private inurement A sponsor should consider providing training materials to project personnel at the beginning of their relationship and periodically (e.g., annually) thereafter.
  • Minimum Level of Engagement- The level of engagement between a sponsor and a project may vary from case to case. However, at a minimum, the sponsor must retain control and discretion of the use of funds, maintain records demonstrating that the funds were used for 501(c)(3) exempt purposes, and limit distributions to projects that further the sponsor’s exempt purposes. (See Rul. 68-489, 1968-2 C.B. 210). A fiscal sponsor that fails to meet these requirements could have its tax exemption revoked. Thus, sponsors should take and keep accurate records of all sponsorship activities, question any compliance issues, and intervene when necessary.
  • Sufficient Resources- Fiscal sponsor should examine whether each project is viable with respect to financial, human, and other resources. Fiscal sponsors generally charge a fee to a project based on a percentage of project revenues. However, such fees may be insufficient for the sponsor to recoup all the costs associated with sponsoring a project that is having trouble generating income or engaging in activities that significantly drain a sponsor’s time, energy, and finances. Since fiscal sponsors assume liability for each project, they should be prepared to lay off employees and terminate inactive or waning projects if future funding and viability is in doubt.
  • Fundraising- Commonly, a project’s personnel takes the lead in soliciting donations and grants. Any project employee or volunteer making representations in this fundraising role should be doing so as an agent of the sponsor. Fiscal sponsors should take steps to assure that such representations are accurate, including training project personnel to avoid any misrepresentations of the project as a separate legal entity. Although all funds raised are the property of the sponsor, the sponsor could be restricted on how to use or distribute those funds because of charitable trust principles. Sponsors should ensure that project personnel are in compliance with fundraising laws and internal policies, and that they are properly documenting any restrictions they have agreed upon or created, by nature of a solicitation (e.g., capital campaign).



Nonprofit Tweets of the Week – October 3, 2014


I returned from a week in Southern California where I enjoyed the work of several nonprofits, including the San Diego Zoo (Safari Park), the Huntington (Botanical Gardens), and Lamb’s Players Theatre (Les Miserables). Have a listen to Albert Hammond‘s It Never Rains in Southern California while perusing our curated nonprofit tweets of the week:

  • Tony Martignetti: What’s next for the @alsassociation after the #IceBucketChallenge? Join #NonprofitRadio 10/3 for a Google+ HOA
  • Stanford Social Innovation Review: #Feminism in the mainstream @ClintonGlobal and the #SocialGood summit @CauseGlobal
  • Gene: Will the Council on Foundations Be a Change Agent or Just a Trade Group? Chronicle of Philanthropy #philanthropy
  • Rick Cohen: Politico’s Lois Lerner Interview Misses the Really Important Issues – #IRS @Politico @IRSnews Nonprofit Quarterly
  • Sandra Feinsmith: Invent A Church, Skip Taxes, Enrage IRS, Go To Jail  via Forbes
  • Gail Perry: Important! What’s the Math? 3 Questions Your Board Members Really Need to Know
  • Council of Nonprofits: #nonprofit advisory boards vs governing boards: a distinction w/a difference
  • Nonprofit Law News: Perspectives – Trends and topics in not-for-profit management – September 2014 | by @beneschlaw #nonprofit #law
  • Foundation Center – SF: Is #fiscalsponsorship right for you, your #nonprofit, your #arts collaboration? We’ll help you decide
  • Gene: Jessica Alba and the Impact of Social Enterprise @SSIReview
  • Emily Chan: California’s flexible purpose corporation renamed the social purpose corporation + other changes signed into law:

Nonprofit Laws for Human Resources Managers to Be Aware Of

Human Resources

It may not be the responsibility of an HR manager in the nonprofit sector to be aware of all of the laws that apply to nonprofits.  However, there are some laws that have impact specifically on matters within the purview of the HR department that are worth being aware of.  Here, we will briefly discuss a few of the laws that might most frequently apply to the work of an HR manager at a Section 501(c)(3) public charity.

Prohibitions Against Private Inurement, Private Benefit, and Excess Benefit Transactions

Private Benefit Doctrine

To qualify as exempt under Internal Revenue Code (“IRC”) Section 501(c)(3), an organization must be operated for the benefit of the public and cannot serve a private interest—a requirement referred to as the private benefit doctrine.  The concern behind the doctrine is that, by providing more than an incidental private benefit to an individual or entity, the organization may not be operated primarily for an exempt purpose, as Section 501(c)(3) requires.

The private benefit doctrine does not entirely prohibit an organization from conferring benefits on individuals; rather, it requires that such benefits to individuals must be incidental, both quantitatively (i.e., the private benefit is not excessive in amount) and qualitatively (i.e., the private benefit is a mere byproduct of the public benefit), to furthering of the organization’s exempt purposes.  The doctrine is the broadest of the private benefit rules that apply to IRC Section 501(c)(3) organizations in that it covers any individual on whom the organization may confer a benefit and includes both monetary payments and other benefits.

Facts and circumstances that may raise a concern regarding the provision of a prohibited private benefit include entering into transactions or providing payments on unreasonable or unfavorable terms to the nonprofit; conferring benefits on private parties beyond what is necessary to further the nonprofit’s exempt purposes; establishing exclusive business dealings with a particular for-profit business; failing to consider alternative sources or comparable prices when purchasing goods or services; and serving too small of a class of beneficiaries.

Private Inurement

A 501(c)(3) exempt organization is similarly prohibited from allowing any part of its net earnings to inure to the benefit of any private shareholder or individual, a rule known as the private inurement doctrine.  The private inurement doctrine generally prohibits a nonprofit from using its assets to provide an unjust enrichment to a person having a personal and private interest in the organization’s activities.

The private inurement doctrine is narrower than the private benefit doctrine in that it applies only to insiders of the organization (i.e., a director, officer, or key employee or other person in a position to influence or control use of the organization’s assets), rather than any individual receiving an impermissible benefit.  However, the restriction on private inurement is absolute, meaning there is no such thing as incidental private inurement, and the penalty for an organization that engages in a private inurement transaction is much stiffer: the potential revocation of its exempt status.

The private inurement doctrine does not bar a nonprofit from entering into any and all transactions with insiders.  Rather, it requires the nonprofit to ensure that it is not providing such insiders with a disproportionate share of benefits based on what the organization is receiving in return.

From an HR perspective, concerns regarding the private benefit and private inurement doctrines are most likely to arise around issues involving compensation.  Some examples of situations in which private inurement violations may be found include:

  • Compensation arrangements with an insider that do not include an upper limit or cap;
  • Compensation arrangements based on factors extrinsic to performance at and benefit provided to the organization; and
  • Payment of more than fair market value for goods or services provided by an insider.

Nonprofits should also be careful when considering entering into transactions that, due to their complexity or uniqueness, may be more difficult to analyze for potential private inurement violations, such as:

  • Compensation arrangements that include considerations such as deferred compensation, bonuses, fringe benefits, or retirement or severance packages;
  • Arrangements that involve assigning rights to intellectual property developed by insiders and funded, in whole or in part, with organizational assets; or
  • Use of organizational assets to support, fund, or otherwise invest in an insider’s business.

Nonprofits may be able to help mitigate against the risk of providing a prohibited private benefit or entering into a transaction involving private inurement by having and using a well-drafted conflict of interest policy and obtaining the assistance of experienced counsel. (more…)


Nonprofit Tweets of the Week – September 26, 2014

Photo credit – E.S. Lim

Summer turned into fall and New York City was the hub of social good events including the People’s Climate March, Social Good Summit, Clinton Global Initiative Annual Meeting, General Assembly of the United Nations and UN Climate Summit. Have a listen to Oscar Peterson‘s version of Autumn Leaves while perusing our curated nonprofit tweets of the week:

  • Liz Maw: Businesses making progress but to get real results need national policy on climate change & price on carbon says Henry Paulson #CGI2014
  • (RED): WOW “Women do 66% of work, produce 50% of food yet earn 10% of income & own less than 1% of land” @conniebritton: #2030NOW #SocialGoodSummit
  • Nell Edgington: Fascinating! New report from @TheEconomist How Gen X and Y are Transforming Philanthropy: #nonprofit
  • Tony Martignetti: A Board Member’s Guide to Nonprofit Overhead by @janmasaoka
  • For Purpose Law: “Is the Form 1023-EZ Too Easy? – Part III – The Applicant’s Decision” –
  • Politico: EXCLUSIVE: Lois Lerner: “I didn’t do anything wrong.”
  • Olive Grove Consulting: Did you catch today’s guest blog? Read “How Fiscal Sponsorship’s Shared Services Can Keep a #Nonprofit on Track”
  • Jan Masaoka: If you need this article, it’s awesome: Nonprofit #auctions: tax compliance guide from BlueAvocadoOrg
  • Fast Company Co.Exist: 5 secrets to engaging aspirational consumers.
  • Ellis Carter: Could a Bay Area news nonprofit take over some of its biggest newspapers?

International Grantmaking: Equivalency Determinations

equal sign

Private foundations in the United States are often interested in funding promising organizations and projects that are based outside of the country. When doing so, these foundations are required to follow certain rules and procedures promulgated by the IRS to help ensure that the foreign grantees are properly using those funds for charitable purposes. Currently, when a private foundation engages in international grantmaking, it has two options for complying with these rules: exercising expenditure responsibility or conducting an equivalency determination.

Expenditure Responsibility

Expenditure responsibility requires that a foundation follow a number of oversight and monitoring procedures throughout the grantmaking process. This includes making pre-grant investigations, entering into a written grant agreement with the grantee, receiving written periodic reports from the grantee, and notifying the IRS in some detail as to each grant. It must be proven that the grantee intends to, and eventually does, use the grant funds to carry out activities that further the charitable purpose of the grantor.

Equivalency Determination

Alternatively, a foundation may conduct an equivalency determination to evaluate whether the foreign grantee is equivalent to a U.S. public charity. This involves a review of its organization (governing documents) and operations to ensure it meets the following requirements described in Section 501(c)(3) of the Internal Revenue Code (IRC):

  • It is organized exclusively for a charitable, educational, or other 501(c)(3) exempt purpose;
  • It is operated primarily for a qualified exempt purpose;
  • It does not engage in any transactions that would result in private inurement or a prohibited private benefit;
  • Its assets, upon dissolution, would be distributed to another nonprofit for a qualified exempt purpose or a government instrumentality;
  • It does not engage in substantial lobbying; and
  • It does not engage in prohibited political campaign intervention.

In addition, the review must ensure that the foreign grantee would qualify as a public charity (and not a private foundation) if it were to apply for IRS recognition of exemption under 501(c)(3). Most public charities qualify as such because they are “publicly-supported” (i.e., they receive a significant portion of their financial support from public sources). For such organizations that do not receive a significant amount of earned income, this may be proven using one of two tests referenced in IRC Sections 509(a)(1) and 170(b)(1)(A)(vi).

First, an organization can demonstrate that it receives at least 1/3 of its total support from governmental units or the public. If the organization cannot meet this first test, it may pass an alternative facts and circumstances test, which requires the organization to establish that, under all of the facts and circumstances, it normally receives a substantial part of its support from government units or the general public.  (For more information about public support, see Adler and Colvin’s Qualifying For Public Charity Status).

The equivalency determination process, outlined in IRS Revenue Procedure 92-94, requires the grantmaker to collect comprehensive information about the foreign organization’s operations and finances to make a “good faith determination” of whether the grantee would be given tax-exempt, public charity status in the U.S., including whether it is publicly supported.

Often, these requirements can be difficult to satisfy because of differences in a foreign grantee’s accounting system, language, and sometimes governing legal system and reporting procedures in the grantee’s own country.

Basic Requirements

The equivalency determination may be done either by the grantor itself, based on information provided in an affidavit completed by the grantee, or by written opinion of legal counsel of the grantor or the grantee. The affidavit is meant to extract all the necessary information about the foreign grantee including financials for the current and previous years, governing documents (often a translated copy is required), details about the board of directors, and descriptions of program activities.

More specifically, in order for a grantee to be equivalent to a public charity based on its level of public support, it must provide the grantor with a financial support schedule for the current year as well as the four most recently completed years. The schedule must be detailed and include information such as grants and contributions received, net income from unrelated business activities, and gross receipts for services performed. Furthermore, the schedule must show contributions from donors that are in excess of 2% of the total support received (because such excess is not included as public support in the public support test).

Proposed Regulations

In September of 2012, the IRS issued proposed regulations that allow private foundations to rely on a broader class of practitioners, not just legal counsel, in making the good faith determination.  The person issuing the opinion may be a “qualified tax practitioner,” such as an attorney, a certified public accountant (CPA), or an enrolled agent.  Foreign counsel is no longer included in this class unless they meet the requirements of a qualified tax practitioner. Although these changes are technically “proposed,” the regulations indicate that a private foundation may rely upon these changes for grants made on or after September 24, 2012.


While the regulations aim to simplify and expand equivalency determinations, the process is quite burdensome and costly. For many years, there was no mechanism for sharing information about foreign grantees among grantmakers, and no uniform standard for collecting and processing the equivalency determination information. Thus, grantees were, and many continue to be, asked to provide affidavits and supplemental materials to multiple grantmakers in various forms. The regulations required each grantmaker to use its own reasonable judgment and good faith determination based on the materials collected. Therefore, foundations were not permitted to rely upon each other’s determinations.

To address these issues, several leading organizations such as The Council on Foundations, InterAction, the Foundation Center, and Independent Sector, worked to create a centralized repository of information to improve the efficiency of international grantmaking. The product of this effort, NGOsource, recently launched an online equivalency determination service and repository . NGOsource members can easily access which projects and organizations are approved for grantmaking purposes, thus eliminating redundant determinations and lowering costs for both the grantmaker and the foreign grantee.

For information about how NGOsource’s equivalency determination service works, click here.