Quoting the article Serving as a Fiscal Sponsor by the law firm Arnold & Porter:
In a fiscal sponsorship, a 501(c)(3) public charity or private foundation receives tax-deductible contributions on behalf of a group or organization that is not recognized by the IRS as tax-exempt under section 501(c)(3). Some projects use fiscal sponsors while their applications for tax-exempt status are pending. Others represent foreign charities raising funds from U.S. donors. And yet others seek to engage in temporary projects that don’t warrant establishing a standalone charity.
Fiscal sponsorship arrangements can vary considerably in structure and are not specifically defined by the IRS or tax laws. In the typical case, the fiscal sponsor pre-approves the group’s project and then receives contributions on its behalf. The parties generally sign a fiscal sponsorship agreement. The key concept that applies to fiscal sponsorship relationships is that the fiscal sponsor must not act as a mere conduit for the non-charity. If it does so, the IRS will disregard the fiscal sponsor and treat contributions and grants as if they were made directly to the non-charity. This would result in denying the tax deductibility of contributions and the requirement for private foundations to exercise expenditure responsibility for grants made to the projects.
Fiscal Sponsorship: A Balanced Overview discusses fiscal sponsorship in more detail, including ways some fiscal sponsorships have been known to go wrong. Watch out for these potential stumbling blocks when granting under this typically valuable structure.