Fellowship grant procedures for young innovators approved

Plain-English summary

A private foundation proposed a fellowship program for young innovators and leaders whose projects would improve life in their state. It expected to award five stipends per year during a trial period, using age, residency, public-benefit, time-commitment, and mission-based criteria while seeking a diverse cohort. Fellows would receive coaching and training, submit reports, and remain subject to monitoring and fund-recovery procedures if money was diverted. The IRS approved the selection, supervision, reporting, and recordkeeping procedures under section 4945(g)(3), so grants made under those procedures would not be taxable expenditures.

Ruling snapshot

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

Full text (IRS public release)

Transcriber's note: this document is a five-page scan. All page images were checked. Obvious OCR errors were corrected, repeated page numbers and form footers were omitted, and blank identifying fields remain blank. Original wording and typographical irregularities are preserved.

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

Employer Identification Number:

Date: March 12, 2019
Contact person - ID number:

Number: 201923029 Contact telephone number:
Release Date: 6/7/2019

LEGEND UIL: 4945.04-04

Y = State
z 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
your grant making program is to provide fellowship grants to encourage the development
of innovative ideas that further your charitable mission of improving the quality of life for
persons in the State of Y. You will do this by providing financial aid and other support to
young innovators and leaders in the State of Y.

Initially, you anticipate awarding five fellowships per year during a trial period of three to
five years. At the end of the trial period, you will evaluate whether to increase or decrease
the number of fellowship grants to be awarded, based upon the number of applications
received, the quality of the work produced by fellows, and other factors related to the
overall success of your program.

Each fellow will receive a stipend of z dollars, payable over the course of the fellowship
period. In addition to the monetary stipend, you will provide fellowship recipients with
support services which may include one-on-one coaching, meetings with other fellows
and thought leaders, and skills training. If intellectual property will be created as a part of

the fellowship, you will negotiate an intellectual property agreement with the prospective
fellow. You will not award loans.

You will publicize your fellowship program on your website and social media platforms, as
well as through a printed brochure which you will distribute broadly through your network
of charitable and civic organizations in the State of Y. You will encourage people from all
parts of the State of Y to apply, including people of color, women, LGBTQ persons, and
immigrants, so that each cohort of fellows has the potential to reflect the diversity and
changing demographics of the State of Y.

You have selected the following criteria for your program:

• Applicants must be between the ages of 21 to 35 at the time of the application
deadline
• Applicants must be a resident of the State of Y as of the application deadline

• Applicants must be able to commit significant time to their fellowship project over
12 months

• Applicants must participate in three cohort convenings/seminars held in different
sites over the 12 months of the program

• Applicants must propose ideas that have an anticipated public benefit for persons
in the State of Y and describe how their proposal may benefit persons in the State
of Y, and

• Applicant’s proposal must reflect one or more of your core values, which include
fairness, dignity, integrity, and equity.

Your employees, officers, directors, members of the selection committee, and the
relatives of all these individuals, as well as “government officials” (as defined in Section
4946 of the Code) will not be eligible to receive fellowships as part of your program.

Your fellowship recipients will be selected by a committee appointed by your Board of
Trustees. Members of your selection committee may include your directors and
employees as well as community and civic leaders from across the State of Y.

You will not impose any subject-matter, field of interest, or similar restrictions on the work
to be performed by recipients of fellowships, except that the fellows’ work must be
consistent with your mission and core values, which include fairness, dignity, integrity and
equity. You expect the range of projects will include artistic endeavors, technological
innovations, public/private/nonprofit sector initiatives, community-based projects, efforts
to improve racial equity and beyond. Your selection decision will focus primarily on the
promise of the applicant’s ideas for improving the lives of those in the State of Y and the
quality of the applicant’s proposed plan of work for their fellowship terms as described in
their written application.

You will consider the following factors in your selection process:

• Preference is given to projects that have moved beyond an initial idea and have
some momentum

• Consideration is given to the diversity of the cohort - you encourage people of
color, women, LGBTQ persons, and rural residents to apply

• Consideration is given to the geographic representation of fellows across the State
of Y

• Consideration is given to the diversity of project ideas when selecting fellows, and
• Consideration of whether the project furthers your core values - your selection
committee derives information from the application and interview process.

The fellowship term will last 12 to 18 months. At the conclusion of the fellowship term,
fellows will be required to submit a written report describing the work performed and
results achieved during the fellowship term. You will also have regular communication
and contacts with your fellows throughout the fellowship which may include formal
meetings, training sessions, and in-formal “check-ins.” All fellows will complete a report at
the 12-month mark regardless of the length of the fellowship.

You will review all interim and final reports submitted by fellows and will take appropriate
actions. 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, and (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 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 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.

• 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.

We've sent a copy of this letter to your representative as indicated in your power of
attorney.

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