I am a nonprofit fiscal sponsor and have a new fiscal client under written agreement that wants to hold a charity event and "charge" for vendor booth rentals. Would this type of revenue received by the fiscal client be considered charitable using my tax-exempt status?
What type of fiscal sponsorship agreement do you have with the sponsored “client”? Is it a “Type A” arrangement where you, the fiscal sponsor, adopt the charitable program as your own and hire the “client,” either as an employee or as a contractor, to do the work? Or is it a “Type C” sponsorship, where you merely make a grant to a non-exempt group to carry out certain charitable activities?
Jeffrey Fromknecht, attorney and president of The Side Project (which frequently enters into Type A sponsorship agreements) and a regular presenter on our annual webinar on fiscal sponsorships, says there is harm in treating a fiscal sponsored project as a “client” that is “using” the exempt status of another organization. A project is either a division of the fiscal sponsor, a project that is undertaken to support and advance the mission of the sponsor, or a grantee.
If your situation is a Type A arrangement and an integrated project of your fiscal sponsoring organization, the revenue of the project event is your revenue, and you are responsible for the event as you would be for any other programming. Many Type A arrangements have provisions in the sponsorship agreement requiring approval from the sponsor before doing any public fundraising, including events like the one you suggest. You will need to assure that you have proper insurance and that the people running the event follow a satisfactory financial control policy to assure that you have control and discretion over the funds.
If your situation is a Type C grant arrangement, you definitely want to have a policy about grantees raising money for your organization (which is the only way the event donors can claim a charitable contribution deduction). You will definitely want to see that the grantee has event insurance that names your organization as an additional insured. You may also want approval rights over the time, place, and program for the event, including whether or not alcohol can be served. If you are in a state that has a sales tax, you don’t want to be in a position in which a non-exempt grantee tries to use your exempt status to buy taxable items to further its own non-exempt program.
You should consider all of these issues before you authorize the event, for the protection of both your organization and the “client.”
The vendor basically doesn’t care about these issues, however. The vendor can deduct the booth rental either as an advertising/public relations expense, or possibly as a charitable contribution if your organization is running the event. Whether it is a charitable sponsorship depends on what the vendor receives for the payment. If all the vendor gets is a space to display its wares, it could be a sponsorship. If the vendor gets space to sell its wares, it is almost certainly a payment for the cost of doing business, which could be deducted only as a business expense. (See Ready Reference Page: “IRS Finalizes Regs Covering Sponsorships”)
The characterization of the payment could have a very minor effect on your public charity status, but it is unlikely to be anything to worry about. (See Ready Reference Page: “Calculating Public Support”). If I were in your position, I would be much more concerned about my potential liability if the event is not run well.