202032006: IRS approves a private foundation's procedures for five educational grant programs

Plain-English summary

A private foundation sought advance approval for five educational grant programs serving students, faculty, artists, writers, and environmental researchers connected with an eleven-institution consortium. The programs would support natural-area research, art and writing influenced by nature, student development, and on-site research housing and food. Applicants had to provide detailed proposals and supporting materials, and a qualified selection committee would evaluate the projects. The foundation also described supervision, progress reports, recovery of diverted funds, and recordkeeping procedures. The IRS approved the procedures under IRC § 4945(g)(3), so grants made under them would not be taxable expenditures if the programs were conducted as proposed. The approval was limited to the described program and required continued objective selection, supervision, charitable use, and adequate records.

Ruling snapshot

• Question: Did the private foundation's procedures for five educational grant programs satisfy IRC § 4945(g)(3)?
• Outcome: approved (expenditures under the approved procedures would not be taxable)
• Key authorities: IRC §§ 74(b), 117(a), 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g)(3); Treas. Reg. § 53.4945-4(c)(1); Rev. Rul. 77-434

Full text (IRS public release)

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

Number: 202032006
Release Date: 8/7/2020

Date: March 12, 2020

Employer Identification Number:

Contact person - ID number:

Contact telephone number:

LEGEND                                         UIL: 4945.04-04

B = Grant
C = Fellowship
D = Fellowship
E = Fellowship
F = Grant
G = Consortium
H = Location
J = Area
k dollars = Amount
l dollars = Amount
m dollars = Amount
n dollars = Amount
o dollars = Amount

Dear:

You asked for advance approval of your educational loan 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 five educational grant programs called B, C, D,
E, and F. The educational grants will be awarded to students and faculty of a consortium
called G, consisting of eleven different colleges and universities.

The purpose of B is to enhance the health and ability of ecosystems in H by providing
scientific information to support land management decisions. B is available to faculty,
undergraduate, and graduate students from G member institutions. B will provide funding
for researchers in natural areas management, biodiversity, and environmental monitoring
research. You are particularly interested in funding projects that involve monitoring a
threatened species, wild rice restoration, oak regeneration, watershed water quality
monitoring, and invasive species monitoring and management.

The purpose of C is to nurture the artistic development of a promising student artist who
is interested in creating art influenced by a close interaction with the natural world. C is
available to any student and faculty mentor of G. The natural world projects may involve
a number of two-dimensional visual art forms including paintings (oils and watercolors),
photography, drawing, and printmaking. Proposals that are inter-disciplinary or connect to
either a B or D program will be encouraged.

The purpose of D is to nurture the development of a promising writer who is interested in
creating works that are inspired and influenced by the natural world. D is available to a
faculty mentor and student of G. Proposals that are interdisciplinary or connect a B or C
program will receive priority. Projects may involve creative or professional writing in the
area of fiction, non-fiction, poetry, or drama. Depending on the genre, the end product
should be comparable to two or three complete essays.

The purpose of E is to nurture the development of promising students who are interested
in natural areas management and research. E is available to undergraduate students of
G. Recipients will complete a number of tasks but will have a focus on either research,
stewardship, or education. Activities include field work, monitoring and identifying
organisms, utilizing technology such as GPS/GIS, sharing findings and experiences
through presentations and papers, communicating with the general public, and working
as part of a team.

The purpose of F is to provide support for the development of promising students and
researchers who are interested in ecological and environmental, and land management
research. F enables a researcher to receive on-site housing and food service during the
summer (Monday through Friday) while conducting a research project at or near G. If
participants will be completing research on the property of G but are not part of other
projects funded by G, they will need to complete a research application.

G is available to individuals or groups conducting environmental and lend management
research in J. Two types of awards are offered: summer-long awards and short-term
awards. Sumer-long awards are for researchers who will spend more than three weeks
(does not have to be consecutive) of the summer completing their work. Short-term
awards are for less than three weeks. Preference will be given to those associated with
other projects funded by G.

Letter 4779 (10-2012)
Catalog Number 58222Y

The application is available on your website. It must include a synopsis of the project,
statement of purpose, project narrative, references, time frame, budget, resume,
transcript, letter of recommendation, and documentation of permission or letters from any
agencies or organizations that will be involved with the research.

Grantees are strongly encouraged to present their results at professional or student
research symposia or conferences. Grantees are also encouraged to submit their results
for publication in scientific journals. Grantees are required to inform you of any
publications and presentations that are the results of your supported research.

You state the grant programs will be publicized through the faculty of G member
institutions. You will also promote the programs through social media and on your
website. Your staff members will visit the member institutes of G and present information
on the grant programs to students in related courses. Your staff will also attend college
information meetings and events.

You intend to award a number of grants sufficient to distribute approximately k dollars in
grants each year. You anticipate that each grant will typically be in the aggregate amount
of l dollars, determined as follows:

• m dollars for each student researcher

• n dollars for each faculty advisor, and

• o dollars for room and board.

The student researcher stipends will be paid annually in installments, with the final
payment paid after the final report is received and all requirements are met. Faculty
stipends will be paid annually in two lump sums, one after the interim progress report is
accepted and the second after the final report is approved.

Most of the grant projects will be designed to conclude at the end of each year so that the
grants are not typically suitable for renewal. On rare occasions where renewal would be
appropriate, you would require significant progress on the project be demonstrated, and
that both the student and faculty advisor remain affiliated with G.

Your selection committee will evaluate all entries. Although your selection process varies
somewhat from program to program, in general the selection committee will evaluate the
quality of the project proposal, the degree to which the proposal connects to your
research purposes, and the extent to which the proposal includes plans to disseminate
the research results to the general public.

The selection committee members must be associated with, or be an employee of, you or
on of the member institutes of G. Committee members must possess expertise in
environmental science, art, or writing. The members will review all applications, score
them, and make recommendations, if needed, for project improvements and then finally
whether the project is funding worthy.

Letter 4779 (10-2012)
Catalog Number 58222Y

You will supervise your grants through the use of faculty mentors, the observations of
your on-site staff, weekly meetings between students and staff to discuss progress, and
periodic progress reports. If the terms of the grant are violated, the student and/or faculty
member will be asked to leave the program and return any unexpended portion of the
grant.

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 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.

Letter 4779 (10-2012)
Catalog Number 58222Y

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

Long-term, low-interest loans that private foundations make for educational purposes can
be considered grants under Code Section 4945(g)(3) and Revenue Ruling 77-434, 1977
2 C.B. 420.

Other conditions that apply to this determination

• This determination covers only the loan program described above. This approval
  will apply to succeeding loan 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 loans 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 loan 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

Letter 4779 (10-2012)
Catalog Number 58222Y

Director, Exempt Organizations
Rulings and Agreements

Letter 4779 (10-2012)
Catalog Number 58222Y