Black Lives Matter Claims Tides is Fiscal Agent, Not Fiscal Sponsor: Seeks $33 million in Donations Held by Tides
From Fiscal Sponsorship – A Brief History and Possible Future
Last week Black Lives Matter Global Network Foundation (BLM) filed a complaint against the Tides Foundation. BLM essentially claims that Tides is a fiscal agent, not a fiscal sponsor. And that Tides breached a contract and various fiduciary duties owed to principals by refusing to disperse donations earmarked for BLM in accordance with BLM’s instructions, as Tides previously promised. BLM’s problem, though, is that donors probably claimed charitable contribution deductions, presumably asserted as proper by everybody involved including BLM. If the donations were properly deducted, with BLM’s acquiescence and encouragement — reverse reasoning means Tides was a sponsor, not an agent. Because Tide had to own the donations, not hold them as agent, if the donors were entitled to deductions. And if Tides was a sponsor and not an agent the money belongs to Tides, not BLM.
The complaint asserts that the donations made to Tides via what sounds like a standard fiscal sponsorship agreement never legally belonged to Tides and that Tides was only an agent — operating as a bank without a license, too. The complaint does not include a copy of the actual fiscal sponsorship agreement. Apparently, the agreement is silent or unhelpful regarding BLM’s agency claim. Because the complaint relies on several alleged verbal assurances BLM admits were not included in the written agreement and apparently admissible under the parol evidence rule. Verbal assurances that Tides would transfer the $33 million in donations to BLM once BLM obtained tax exemption. Tides could actually do that consistent with its own exempt purpose. But it would not and could not be required to do so if donors claimed tax deductions. If Tides was a sponsor, and the owner of the money, I am not sure the alleged oral promises are even enforceable as a matter of contract or tax exemption law.
Standard fiscal sponsorship agreements include language explicitly indicating that donations made to a “project” fiscally sponsored by an IRC 501(c)(3) will be disbursed according to the directions of the project fiscally sponsored. That would make fiscal sponsorships “donee [rather than donor] advised funds.” In such a fund, the sponsor is the real owner but takes advice from a particular donee to which the sponsor may make distributions in accordance with its own exempt purpose. Like donor advised funds, most sponsors probably follows the advice of the donee. The idea is that a donee will advise disbursement, usually to itself, and the sponsor will follow the advice. But it can’t be required to do so. Just like in a donor advised fund. There is no reason to think the written contract in this case is any different since that seems pretty clearly to be the industry standard.
If the sponsor has no discretion about the use of the funds and must comply with the donee’s instructions — “give us all the donations in the account” — than the sponsor is a mere agent. That mean the fiscal sponsor is not the legal and beneficial owner of the donations. Donations to a mere agent for an organization that does not yet have (c)(3) status are clearly non-deductible. The Service has a 1994 CPE text on the topic that seems to indicate that such “fiscal agencies” don’t work for charitable contribution or exemption purposes. Not even if donors who expect that their donations are to be used to sponsored project.
It took me a little while to read up on the details of deduction generating and exemption supporting fiscal sponsors and how they differ from non-deduction generating and noncharitable purpose supporting fiscal agents, but the primary difference is that an agent has no discretion with regard to funds under management. The complaint essentially argues that the Tides Foundation — one of the largest in the industry — is not a sponsor but an agent. Of course, this contradicts the charitable deductions donors presumably took when they donated to Tides’s sponsorship of BLM. Because at the time BLM had not yet acquired 501(c)(3) status and donations to that organization could not have generated a charitable contribution deduction.
The leading authority on Fiscal Sponsorship is probably Gregory Colvin, whose book, FISCAL SPONSORSHIP: 6 WAYS TO DO IT RIGHT, is cited or relied on by just about everybody else. For example, citing Colvin, the CharityLawyer blog says that a fiscal sponsorship must meet these “IRS criteria:”
- Grants/donations are given to a 501(c)(3) tax-exempt organization (the sponsor) that acts as guardian of the funds for a project that does not have 501(c)(3) status.
- The sponsor must use funds received for specific charitable projects that further the sponsor’s own tax-exempt purpose.
- The sponsor must retain discretion and control as to the use of the funds.
. . .
“When donors contribute funds to a non-exempt project [like BLM before it acquired (c)(3) status] that has a fiscal sponsor, the donations are tax deductible.” Presumably because the sponsor is tax exempt and retains ultimate control over the donations. In contrast to a fiscal sponsor, a fiscal agent works for the non-exempt organization for which donations are designated and retains no ultimate control over donations and grants. Donations made to a fiscal agent are not deductible because the sponsor lacks ultimate control and is only facilitating an earmarked charitable contribution deduction process. Everybody knows earmarks are fatal to a 170 deduction.
I think BLM is going to have a real hard time proving Tides is an agent rather than a sponsor. Its whole case is based on the assertion that Tides is its agent and was never its sponsor. The suit feels like an act of desperation. And I would be very surprised if an organization with more than $3 billion under management, according to some sources, doesn’t know the difference between agents and sponsors.
darryll k. jones