A foundation's artist and musician grant procedures satisfy section 4945

Plain-English summary

A private foundation proposed two programs offering grants and awards to artists and musicians. One program would fund projects intended to develop artistic or musical careers, while the other would recognize adult musicians through adjudicated auditions, monetary prizes, and performance opportunities. Applicants would be screened under published eligibility rules, evaluated by qualified independent committees, and required to report on their use of grant funds. The foundation also promised to investigate diversions, recover misused funds, withhold further payments when necessary, and keep detailed grant records. The IRS approved the procedures under section 4945(g)(3), so grants made under the described programs will not be taxable expenditures if the foundation operates them as proposed.

Ruling snapshot

• Question: Do the foundation's procedures for selecting, monitoring, and documenting grants to artists and musicians satisfy section 4945(g)(3)?
• Outcome: approved (expenditures under the described procedures will not be taxable)
• Key authorities: IRC §§ 74(b), 117(a), 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g); 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: March 11, 2020

                                                            Contact person - ID number:
Number: 202023010
Release Date: 6/05/2020

                                                            Contact telephone number:

LEGEND                                                     UIL: 4945.04-04

X = Name
Y = Name

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

You are operating a grant making program. The purpose of your program is to provide
grants on an as needed basis for individuals pursing an interest in music. Under your
program, you will offer X and Y. X is directed toward individuals for artistic merit in the
visual or performing arts, for scholastic achievement in literature, scientific research,
environmental preservation and research, and for demonstrated leadership in
community affairs. Y is designed to encourage young musicians, who demonstrate
talent, perseverance, and fine musicianship to pursue a career in music.

Details of X

The purpose of X is to support artists and musicians with diverse backgrounds
looking to either pursue, establish, or advance their individual careers and personal
ambitions as artists and musicians. Under X, you will provide opportunities to artists
and musicians who are at least eighteen years of age and have graduated from high
school. Moreover, X will be opened to individuals who are either aspiring or
established artists or musicians, including composers, conductors, and performers of
music; vocal artists; dancers; artists working in drawing, painting, sculpture, film,
video, and new media; authors (fiction and nonfiction); poets; scholars or teachers of
visual or performing arts; playwriters and screenwriters; dramatic artists and actors;
and designers and architects.

Examples of what X will fund include but are not limited to the following:

• A grant to an individual recognizing outstanding musical talent or
  demonstrated potential to encourage their development;

• A grant to an independent vocal artist (not signed to a recording contract) in
  order to compose a piece of music or make a recording that showcases their
  musical talents.

• A grant to a young artist desiring to pursue a career in visual arts in order to
  assist in procuring an appropriate venue or forum to showcase their talents.

• A grant to a new playwright to provide a forum for the performance of a play with
  performances of high theatrical quality.

You will promote X and make your application available on your website. Applicants
are required to complete the application with required attachments including a resume,
letters of reference, list of goals, description of relevant experience and
accomplishments. Applicants must also submit a detailed proposal for which the funds
are requested, including:

• A clear goal or objective and the amount of funding requested;

• A description of the relevance of the proposed activity to his or her overall
  goals as an artist or musician as well as the estimated time for start and completion
  of the project;

• An explanation substantiating their ability to fulfill the proposed activities given
  the timeframe and resources;

• An explanation detailing how the potential for the experience resulting from
  the grant is a building block to another opportunity;

• A brief statement of how the applicant’s project is unique and how the project
  will contribute importantly to the promotion of the arts or music.

In addition, you will ask the applicant how he or she learned about X. Further, you
will consider, review, and evaluate the responses to this question so that you can
modify the advertising and promotion of X to attract an increasingly diverse and
increasingly qualified pool of applicants.

All applications will be evaluated by your screening committee who will nominate
qualified candidates to interview in front of your selection committee which is comprised
of highly qualified professionals with diverse artistic and/or music backgrounds and
distinguished qualifications (e.g., professors from educational institutions who do not
have a conflict of interest with respect to any of the applicants). Your selection
committee will also review the quality and creativity of the work of each nominee, as
well as their potential to benefit from the grant.

After the interviews, your selection committee will recommend to you the number of
grants to award and the individual amounts of the awards for your approval.

Recipients are to review and return to you an executed copy of your Award Letter, which
will require the recipient to at least annually provide:

• A narrative description of programmatic accomplishments;

• A financial report to include; (i) actual revenues and expenses to date related to
  the program or project; (ii) all expenditures made to date from the grant funds; (iii)
  a program or project budget for any subsequent year(s) of the grant; and (iv) a
  listing of new or amended sources of funding in support of the program or project;

• Any challenges or obstacles encountered and how, if at all, they affected progress
  on the overall program or project;

• Any modifications to the original scope of the program or project, any program or
  project results or achievements, and any milestones reached that are necessary to
  achieve the grant’s;

• Any unintended outcomes and any lessons learned, or any impact on the Grantee
  such as career enhancement, other funding or opportunities, or recognition.

Details of Y:

The purpose of Y is to recognize musicians in their music making through adjudicated
auditions. In addition to monetary prizes, award winners are given the opportunity to
attend and perform at one or more special concert events that will help develop their
musical talents and jump-start their careers in music.

To be eligible for an award under Y, an individual must be 18 years of age or older as
well as meet one of the following:

• An amateur adult without a professional degree in music; or

• A Conservatory/University student pursing a degree in music; or

• An individual pursuing a professional career in music.

To promote Y, you will provide announcements to departments of music at colleges,
universities, and conservatories. Announcements will also be distributed to, and included
in, publications targeted to an audience of musicians and vocalists. Applicants are
required to complete and submit to you an electronic application by a specified deadline,
which will be made available on your website.

The application requires the applicant to provide general identifying information, their
specific experience and background including relevant accomplishments and degrees
earned. Each applicant must also indicate whether they are an amateur adult without a
professional degree in music, a conservatory/university student pursing a degree in music
or an individual pursuing a professional career in music. Each applicant must also submit:

• A sample audio performance and a sample video performance demonstrating
  their musical talents;

• An essay describing their past accomplishments and future goals;

• Letters of recommendation (which must include recommendations from one or
  more instructors, mentors, or employers).

• And a modest fee.(This amount is to be determined and may be subject to waiver
  for low-income applicants).

The application also asks the applicant how he or she learned about you so that you may
continuously improve Y. Furthermore, as you implement Y, you will consider, review, and
evaluate the responses to this question so that it can augment your advertising and
promotion of Y to attract an increasingly diverse and increasingly qualified pool of
applicants.

Each application that you receive will be initially reviewed and evaluated by a
screening committee composed of qualified individuals in piano, voice, or music. The
screening committee will review the applications and required attachments to
determine those who substantiate that they meet your eligibility criteria. From this
eligible pool of applicants who satisfy the threshold criteria, the screening committee
panel will select and invite candidates to audition in front of a selection committee
consisting of a of three judges.

After all of the candidates have performed, the judges will convene in private to discuss
each candidate's performance. All candidates may be evaluated on tone quality,
interpretation and musicianship, technique, their choice of materials, appearance,
improvisation, poise, memorization and/or mastery of technical difficulty. After
considering and evaluating the candidates, the Judges will recommend the number of
award recipients and the individual amounts of each monetary award. In addition to a
monetary award, award recipients may also be provided with an opportunity to attend
and/ or perform at tone or more special concert events. The total award amount available
for Y will be determined in advance of each competition with your input after considering
the amount funding of available.

Oversight for X and Y:

If you learn that grants funds under X or Y have been used for an unintended purpose,
you will take all reasonable and appropriate steps to recover the grant funds or to ensure
the restoration of the diverted funds to the appropriate purposes of the grant. You will
withhold further payments to the recipient until the diverted funds have been recovered or
restored; you receive the grantee's assurances that future diversions will not occur; and
the grantee agrees to take extraordinary precautions to prevent future diversions from
occurring.

You will retain records pertaining to all grants made. Such records shall include all
information you secured to evaluate the qualification of potential recipients; identification
of recipients (including any relationship to you sufficient to make the recipient a
disqualified person); specification of the amount and purpose of each grant; and any
follow-up information that you obtain in compliance with the relevant Treasury
Regulations.

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.

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