In which Fractured Atlas defends itself...
Above is an email I received from Adam Huttler, Executive Director of Fractured Atlas. You can see my question in the body, but basically I wanted to know if the recipients of 501(c)(3) donations through Fractured Atlas have the same limitations placed upon them as a 501(c)(3) company that does not use a clearing house to accept donations. According to this email, it would seem that Mr. Huttler is saying that they do, and that the sponsored projects of Fractured Atlas are not “allow[ed] to circumvent IRS rules."
Taking Mr. Huttler up on his offer of additional questions, I replied, asking if Fractured Atlas advises its sponsored projects as to the limits on political communication in the tax code, and if they monitor the actions of those sponsees. Here his answer got a bit confusing, at least to me, as he took on the specific charges I leveled in my previous blog post.
Mr. Huttler seems to be saying that if Fractured Atlas funds were used for an anti Mitt Romney play it might be legal and it might not be, that the law is complex and subjective. Fair enough, but he goes further. Arguing in the alternative, he indicates that even if Co-Op Theater East’s reading ran afoul of the tax code, it is a “non-issue” because no charitable funds went directly to the reading. If this is true, it does indeed represent a massive loophole for those companies who use 501(c)(3) clearing houses to collect donations.
The code is clear that 501(c)(3) companies must be “exclusively” engaged in exemptible activities, not that they maintain a firewall between charitable and earned income with regard to non exemptible activities. This is why one may not deduct donations to Citizens United, a 501(c)(4), but may deduct donations to Citizens United Foundation, their 501(c)(3) division. It is not enough to ensure that funds are not commingled, there must two separate corporations formed. Put another way, the Public Theater may not hold a fundraiser for President Obama even if they can show that only earned income was used to pay for it. However, if Mr. Huttler is correct, a theater or any arts company can do just that, using a clearinghouse, provided that they show that tax deductible funds were only used for exemptible purposes.
Digging a little deeper I went to the Fractured Atlas website to see if it had any information regarding which section of the tax code allows companies not exclusively engaged in exemptible activities to receive deductible donations. Here I got quite a shock. On their page regarding fiscal sponsorship I found this language, regarding the legality of this kind of charitable giving.
Anytime you're dealing with the IRS (which regulates these issues), you can bet there are going to be some complicated legal issues involved. Many well-intentioned, legitimate organizations across the country provide fiscal sponsorship programs for artists. Very few of them are doing it legally, though, and most don't even realize the danger in which they're putting themselves and their sponsored projects. If the IRS ever decides to crack down, they could lose their 501(c)(3) status, and their sponsored projects could be forced to return any money raised under the arrangement.”
So according to the website of a major fiscal sponsor, the majority of fiscal sponsors to the arts in the US are breaking the law. What? And why isn’t the IRS cracking down? Its not like the federal budget is awash in extra cash. Aside from the question of how all of these other fiscal sponsors can be both “legitimate” and engaged in tax fraud, the bigger question is, why is it legal when Fractured Atlas does it? To this question, I have found no answer. Maybe I will have to ask the IRS directly.
Here is the problem with all of this. Having a rich uncle who is willing to invest in your new business is a time honored advantage for their entrepreneurial nieces and nephews, but there is no reason that the Federal Government should be providing tax deductions for those investments. Unlike soup kitchens and foreign aid groups, which do not have commercial competitors, these theater companies do. So not only is tax fraud on a massive scale being perpetrated by Fractured Atlas’ competitors, but unsubsidized theater companies are forced to compete with theater companies accepting this illegal, free money.
The deeper one looks into the subterranean depths of theater funding, the more it looks like a fraud, perpetuated against the tax payer, and intended to make sure that the rich maintain their position as the arbiters and gatekeepers of American Theater. It is time to break down the gates.