This information on Fiscal Sponsorship is summarized from these sources:

Colvin, Gregory. 2000. Fiscal Sponsorship: Six Ways to Do it Right. Study Center Press.
CompassPoint. Nonprofit Genie. This set of Frequently Asked Questions on Fiscal Sponsorship was written for the GENIE by David Barlow, CPA.
Foundation Center - Learning Lab - FAQ.

Fiscal sponsorship, sometimes called fiscal agency, is a legal way to receive tax-deductible contributions and grants by putting your project under the tax-exempt umbrella of an existing nonprofit organization. It's a simpler and less expensive way to receive funds for charitable purposes than creating a free-standing organization. This concept is very helpful to small nonprofit organizations and start-up programs that cannot support the expense of establishing a free-standing organization.

Fiscal sponsorship can also be valuable for start-up programs in any field. It enables the organization to concentrate on program development instead of the administrative details of forming a nonprofit, tax-exempt organization. To find a fiscal sponsor, look for an existing nonprofit that has a similar mission to yours. Look for organizations in your community that have experience with fiscal sponsorship or are willing to learn about it. A good place to start is with your local community foundation - often a fiscal sponsor for a variety of community projects. If it can't provide the fiscal sponsorship it may be able to direct you to another organization. 

Typically, fiscal sponsors provide more than use of their tax-exempt status. They provide accounting services at a minimum and often provide other administrative support services and even fundraising and strategic planning guidance. Fees for fiscal sponsorship services vary but average around 10 percent. Setting up an independent nonprofit organization is far more costly than spending 10 percent of your organization’s income on administrative functions.

The potential for abuse of fiscal sponsorships exists. An unscrupulous nonprofit paired with a less-than-honest entity could create a tax-exempt project when none should exist. But both risk substantial fines from the IRS and possible loss of the nonprofit tax-exempt status. If you want to undertake a project or begin a program in the nonprofit sector, think seriously about beginning with a fiscal sponsorship arrangement. It can save you money and give you more time to devote to your program.