IRS pre-approves a foundation's internship and research grant procedures

Plain-English summary

A private foundation asked the IRS to approve, in advance, the procedures it uses to award educational grants under Internal Revenue Code section 4945(g)(3). Private foundations normally owe an excise tax on grants to individuals for study or similar purposes, but a grant escapes that tax if the foundation's award procedures are pre-approved by the IRS. Here the foundation runs a program that funds internships for undergraduate and graduate students and supports the research of academic scholars, all aimed at deepening understanding of long-term economic and fiscal issues tied to the foundation's mission. The IRS approved the procedures, finding they award grants on an objective and nondiscriminatory basis, ensure recipients actually perform the funded work (interns complete a 10-week placement, researchers submit draft and final papers), and require the foundation to collect reports and police against diversion of funds. As long as the foundation runs the program as described, its grant payments will not be taxable expenditures under section 4945. The approval is specific to this foundation and carries the usual conditions: it cannot fund insiders or their relatives, must keep records, and must report significant program changes.

Ruling snapshot

• Question: Do the foundation's educational-grant (internship and research) procedures qualify for advance approval under section 4945(g)(3)?
• Outcome: Approved
• Key authorities: IRC § 4945(g)(3); Treas. Reg. § 53.4945-4(c)(1); IRC §§ 117(a), 170(b)(1)(A)(ii), 74(b), 170(c)(2)(B)

Full text (IRS public release)

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

Release Number: 201852022
Release Date: 12/28/2018 Employer Identification Number:
Date: September 18, 2018

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

c dollars = Amount
d dollars = Amount
e dollars = Amount
f dollars = Amount

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. The purpose of
the grant is to assist recipients in their efforts to increase their knowledge and
understanding of economic and fiscal issues related to your mission.

You intend to award grants to support internships for undergraduate and graduate
students and grants to support the research of academic scholars. The goal is to enable
students and researchers to increase their knowledge and understanding of long-term
economic and fiscal issues.

Grants will generally range from c dollars to d dollars to interns depending on duration of
internship and educational level, and e dollars to f dollars to researchers to produce
reports or other similar products, depending on the complexity of the research and
amount of resources required. The amount of internship grants will be based on the

length of a student's internship and the student's educational level. The amount of
research grants will be based on the complexity of a research project.

The programs will be publicized through direct email communication to universities and
professors, think tanks, and other organizations that are producers and consumers of
research on topics of your interest. The opportunities will also be publicized on your
website and social media accounts, the intern alumni group, and through your network of
policy researchers and experts. Where appropriate, notifications will be posted in
academic journals or other media whose readership might be interested in the grant
opportunity.

Students currently enrolled in college or graduate school with interests that intersect with
your programs will be eligible for internship awards. Academic scholars and researchers
at academic institutions or policy research organizations with expertise and interest in
areas that intersect with your mission will be eligible for research scholarship awards.

Selection criteria will include: past performance, published works, quality of proposal,
statements of interest, and potential for the award to increase the capacity of the intern or
researcher or to enhance knowledge in the field.

All awards will be made on an objective and non-discriminatory basis without regard to
race, gender, religion, or sexual orientation. No grants will be made to your officers or
employees or their family members. In addition, grants will not be made that are
inconsistent with your charitable purposes.

The number of grants will be determined annually and in each instance based on the
number of qualified proposals, the available program budget, your staff's capacity, and
the capacity of the outside advisors.

In the case of internships, to receive the full amount of the award, recipients will be
required to complete the 10-week internship period and provide evidence of participation
in internship activities at the host organization. To receive the full amount of the grant
award, recipients of research grants will be required to submit draft and final papers.
Grants are not renewable.

For research grants, grantees would be required to submit one or more of the following
items produced in connection with the grant: periodic narrative reports, semi-
annual/annual financial reports, grant work product, and other materials related to their
activities (i.e., articles, op-eds, presentations, reports, event and conference materials,
manuscripts, etc.). Recipients of research grants may be required to submit drafts of
papers and participate in research conferences to discuss their work.

You reserve the right to cancel any grant if you determine that the grantee's performance
is unsatisfactory or that the grantee will be unable to complete the project as set forth in
their proposal, or that the grantee has otherwise breached a material term of the grant
agreement. You will pay recipients directly.

Letter 4779 (10-2012)
Catalog Number 58222Y

For internships, you will select institutions and scholars to host interns. The institutions
will represent a wide cross-section of views on issues related to your mission. Internship
applications will be shared with the scholars who will oversee the interns' work at the
selected institutions. Each scholar will select their institution's intern, subject to your
criteria.

For research grants, the selection committee will be made up of scholars or policy
experts outside of your organization who have a demonstrated interest in your mission
and vision. Members will be selected to create a diversity of perspectives, relevant
expertise, and backgrounds.

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 the 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 diversions
from occurring.

You represent that you will maintain all records related to the following: (1) individual
grants including information to evaluate grantees, (2) grantees which are identified as a
disqualified person, (3) how the amount and purpose of each grant was established, and
(4) how you established supervision and investigation of the 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
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 Regulation Section
53.4945-4(c)(1) requires that a private foundation show:

Letter 4779 (10-2012)
Catalog Number 58222Y

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.

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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4779 (10-2012)
Catalog Number 58222Y