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Fiscal Sponsorship

The following article is an introduction to a new service provided by SCI.

A fiscal sponsor is a go-between. In a recent SCI e-mail questionnaire, that was a point many members misunderstood. If the Society of Composers serves as fiscal sponsor for you or your organization, SCI does not give you its own money. Nor does SCI go out and raise money for you. What it does do is receive-on your behalf-money that you have raised and monitor the way you spend it. (At first blush it doesn't sound very appealing, does it?)

The purpose of this article is to give you an idea of the scope of fiscal sponsorship and explain why the trouble and expense (SCI gets a small percentage for its services) is sometimes worth it. Of course, some grants require a fiscal sponsor, so you're stuck with one whether you like it or not. Still, we'd like you to know enough about the service so that you can determine whether it is appropriate for you or your circumstances.

Over the last few years, grants and donations have increasingly gone through fiscal sponsors. A grantor, for instance, may want independent oversight of the activity being funded. Foundations or agencies are frequently not in a position to monitor all the activities they support, and misuse of their grants is one of the surest ways to have their tax-exempt status called into question by the IRS. Also, grantors usually want to pass along as much of their money to their grantees as possible, and that means not spending large amounts on reviewers and auditors. The transferring of oversight responsibility to a fiscal sponsor makes sense even for large granting organizations because a fiscal sponsor is expected to have more expertise in the activity being supported than the grantor.

If the go-between is a tax-exempt organization (like SCI) it can render the money it receives (on behalf of the grantee) tax exempt for the purposes of the grantor. That is not an issue if the grantor is a foundation, but it can be crucial for small or private donations. In other words, the money received from an individual can become a tax-deductible contribution-even if the eventual recipient is not a 501(c)(3)-if the money is passed through SCI. This is not, however, a simple laundering operation. Responsibility is assumed by an independent third party (in this case, SCI) for the activity that the funds support.

Since tax issues are at stake, scrutiny of fiscal sponsorship can be expected. In all cases, the money must be paid directly to the sponsor. (Your organization cannot receive money and simply tell SCI that you got it.) Two points are crucial to the IRS. First, the fiscal sponsor must exercise sufficient supervision over the funds being donated to support the activity. Second, the funds must be used by the grantee only for charitable purposes that further the exempt purposes of the fiscal sponsor. That is why SCI recently went to the trouble of changing its certificate of incorporation, to include performance and composition specifically. The older certificate leaned heavily toward education.

What kind of activities can make use of fiscal sponsorship? Any that would ordinarily be tax-exempt but, for some reason are not. For instance, you may have a small group that performs your music. The fact that your group is not incorporated as a 501(c)(3) means that you cannot raise tax-deductible contributions. In general, grants to groups are easier to fund than to individuals. Unfortunately, it appears that individual commissions to a targeted composer do not qualify.

Details of SCI's fiscal sponsorship program have yet to be finalized, but they will probably include two types of contracts between SCI and the grantee. One will detail the terms of the sponsorship and another will be an advance agreement that may be used to strengthen a grant application. For instance, it could be valuable for someone seeking to mount a large production to demonstrate to potential donors that a mechanism is already in place for administrating (as well as rendering tax-exempt) any donations received.

In preparation for fiscal sponsorship SCI will, from 1998 on, have its books audited on an annual basis. In the past our financial reports, while reported to all appropriate agencies, were not subject to a full audit. Some agencies, especially state agencies, will expect a fiscal sponsor to have audited financial reports. This will increase the cost of our tax filings by a significant amount. The fee charged by SCI (4 to 8 percent has been suggested) is not expected to cover these costs. Still, if the service is valued by our members, the cost will be worth it.

We welcome your comments on this program and particularly the suggestions of members who have already made use of fiscal sponsorship through another organization.

Gerald Warfield