Public-interest law fellowship procedures approved

Plain-English summary

A private foundation proposed fellowships for graduating law students to work for nonprofit organizations providing civil legal services to people with low incomes or those deprived of civil or human rights. Applicants would submit project proposals and supporting materials, and selection committees would evaluate academic performance, experience, character, public-interest commitment, project quality, and host effectiveness. The foundation would pay host organizations in quarterly installments, require reports, investigate diverted funds, and withhold or recover payments when necessary. The IRS approved the procedures under IRC § 4945(g)(3), so expenditures made under the program as proposed would not be taxable expenditures.

Ruling snapshot

• Question: Did the foundation's public-interest law fellowship procedures satisfy the advance-approval requirements for grants to individuals?
• Outcome: Approved
• Key authorities: IRC §§ 74(b), 117(a), 170(b)(1)(A)(ii), and 4945(g)(3); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Employer Identification Number:

Date: May 12, 2016
Contact person - ID number:

Number: 201632025 Contact telephone number:
Release Date: 8/5/2016

LEGEND UIL: 4945.04-04

B = Fellowship Program
C = Law School

w dollars = Amount
x dollars = Amount

y = Number
z= Number
Dear

You asked for advance approval of your educational grant procedures under Internal
Revenue Code section 4945(g)(3). This approval is required because you are a private
foundation that is exempt from federal income tax.

Our determination

We approved your procedures for awarding educational grants. Based on the information
you submitted, and assuming you will conduct your program as proposed, we determined
that your procedures for awarding educational grants meet the requirements of Code
section 4945(g)(3). As a result, expenditures you make under these procedures won't be
taxable.

Description of your request

Your letter indicates that you will operate an educational grant program called B.

The purpose of B is to increase the number of people who receive much-needed legal
services and to help new lawyers pursue a career in public interest law. You will award
fellowships for the recipients (fellows) to work as an employee for a host organization that
provides civil legal services to the poor (including the working poor) and/or those
deprived of their civil or human rights. The fellow will work on a new project developed
with the host organization or on one of the host organization’s ongoing projects. The host
organization must be a domestic 501(c)(3) non-profit organization and have at least two
lawyers on staff.

Each fellowship award will usually include a one-year salary of w dollars and a maximum
of x dollars to help the host organization cover the cost of health benefits for the fellow.
The host organization must provide health benefits that an employee of the host
organization with similar experience and/or responsibility would be entitled to and agree
to pay costs exceeding the x dollars provided by you. In addition, any changes you make
in the amount of the fellowship award will be comparable to similar fellowships. Moreover,
the fellowships will be awarded for one year with an option to renew for a second year
upon the request of the fellow and host organization and within your sole discretion. You
will award about y fellowships the first year and approximately z each year after that
including new and renewal grants. In addition, you will award new fellowships once a
year.

Students in their last year of law school at C are initially eligible for B. After you ensure
that the application process and fellowship program are efficient and effective
(approximately one to two years), you may open B to students in their last year at other
law schools. You will advertise and publicize information B on the law schools’ job
boards as well as notify the career services offices so that they may inform students
interested in pursuing public interest legal careers.

You require applicants to provide you a resume, law school transcripts, professional
references, and write two essays. The first essay requires the applicant provide a
detailed proposal that either describes a new project they will pursue with the host
organization or a description of one of the host organization’s ongoing projects. The
proposal must include (1) an overview of the project, including the legal rights and client
constituency they will address; (2) an explanation for the need for the project; (3)
individual responsibilities and goals to be met by the project; and (4) how the goals will
further the public interest.

The second essay requires applicants to describe their motivation to become a public
interest lawyer and how their previous experiences have prepared them for the
fellowship.

The host organization must also provide a separate letter as part of the application
process. The letter should include (1) the organization’s purpose and mission; (2) a
statement of its interest in and commitment to the proposed project, including any plans
for the fellow’s training and professional development; (3) the proposed work
environment for the fellow, including work space, support staff, and other resources; (4)
the name of the fellow’s immediate supervisor, his/her experience in the substantive area
of the fellowship project, and plans for supervision; and (5) whether the organization will
be able to provide the additional cost for health benefits if the employer's contribution
exceeds dollars. If the organization will not be providing health insurance coverage, the
host organization should provide a clear explanation (e.g., that the proposed fellow has
waived coverage). The host organization must also agree to provide malpractice
coverage to cover any of the fellow’s activities during the course of the fellowship.

Letter 4779 (10-2012)
Catalog Number 58222Y

Recipients will be ranked and chosen by a selection committee which will generally
consist of individuals who have a Juris Doctorate. Additionally, they must either serve on
your board or win a majority vote by your board. Furthermore, if you decide to open B to
students in their last year at other law schools, you may create selection committees for
each school. You will also seek partnerships with private law firms near each university.
You will ask that at least one lawyer from the firm serves on the fellowship selection
committee to help select fellows from the local law school and provide mentorship to the
fellow.

The recipients will be selected based on a variety of factors including academic
performance, professional experience, character, and demonstrated commitment to the
public interest as well as. The proposed project’s quality and the demonstrated
effectiveness of the host organization will also be considered. In evaluating these factors,
the committee will look to the applicant’s resume, essays, law school record, references,
and host organization’s letter of support.

You will provide grants directly to the fellow’s host 501(c)(3) organization for the fellow’s
benefit. You will send supporting payments in quarterly installments each September,
December, March, and June. Fellows must submit quarterly reports to the Foundation
describing their experience. If no report is received or a report indicates that funds are not
being used in furtherance of the intended purpose, the grant will be investigated.
Payments will be withheld until satisfactory reports are received and an attempt will be
made to recoup any diverted funds.

To qualify for renewal of the fellowship , you will require two additional reports. First, the
fellow will submit a final report describing outcomes and plans for the next year. Second,
you will require a progress report from the fellow’s supervisor.

You represent that you will complete the following: (1) arrange to receive and review
grantee reports annually and upon completion of the purpose for which the grant was
awarded, (2) investigate diversion of funds from their intended purposes, (3) take all
reasonable and appropriate steps to recover the diverted funds, ensure other grant funds
held by a grantee are used for their intended purposes, and (4) withhold further payments
to grantees until you obtain grantees’ assurances that future diversions will not occur and
that grantees will take extraordinary precautions to prevent future diversion from
occurring.

You represent that you will maintain the following: (1) all records relating to individual
grants including information obtained to evaluate grantees, (2) identify whether a grantee
is a disqualified person, (3) establish the amount and purpose of each grant, and (4)
establish that you undertook the supervision and investigation of grants described above.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(Code section 4945). A taxable expenditure is any amount a private foundation pays as a
grant to an individual for travel, study, or other similar purposes. However, a grant that

Letter 4779 (10-2012)
Catalog Number 58222Y

meets all of the following requirements of Code section 4945(g) is not a taxable
expenditure.

• The foundation awards the grant on an objective and nondiscriminatory basis.
• The IRS approves in advance the procedure for awarding the grant.
• The grant is:

• A scholarship or fellowship subject to section 117(a) and is to be used for
  study at an educational organization described in section 170(b)(1)(A)(ii); or

• A prize or award subject to the provisions of section 74(b), if the recipient of
  the prize or award is selected from the general public; or

• To achieve a specific objective; produce a report or similar product; or
  improve or enhance a literary, artistic, musical, scientific, teaching, or other
  similar skill or talent of the recipient.

To receive approval of its educational grant procedures, Treasury Regulations section
53.4945-4(c)(1) requires that a private foundation show:

• The grant procedure includes an objective and nondiscriminatory selection
process.

• The grant procedure results in the recipients performing the activities the grants
were intended to finance.

• The foundation plans to obtain reports to determine whether the recipients have
performed the activities that the grants were intended to finance.

Other conditions that apply to this determination
• This determination covers only the grant program described above. This approval
will apply to succeeding grant programs only if their standards and procedures
don’t differ significantly from those described in your original request.

• This determination applies only to you. It may not be cited as precedent.

• You cannot rely on the conclusions in this letter if the facts you provided have
changed substantially. You must report any significant changes in your program to
the Cincinnati Office of Exempt Organizations at:

Internal Revenue Service

Exempt Organizations Determinations
P.O. Box 2508

Cincinnati, OH 45201

• You cannot make grants to your creators, officers, directors, trustees, foundation
managers, or members of selection committees or their relatives.

Letter 4779 (10-2012)
Catalog Number 58222Y

• All funds distributed to individuals must be made on a charitable basis and must
further the purposes of your organization. You cannot award grants for a purpose
that is inconsistent with Code section 170(c)(2)(B).

• You should keep adequate records and case histories so that you can substantiate
your grant distributions with the IRS if necessary.

Please keep a copy of this letter in your records.
If you have any questions, please contact the person listed at the top of this letter.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Letter 4779 (10-2012)
Catalog Number 58222Y