IRS approves a private foundation's procedures for awarding educational enrichment grants to individuals

Plain-English summary

When a private foundation makes grants to individuals for study, travel, or similar purposes, those payments are "taxable expenditures" that trigger an excise tax unless the IRS approves the foundation's award procedures in advance under § 4945(g). This foundation runs an educational grant program that funds enrichment opportunities (music and art lessons, sports fees and equipment, summer camp, vocational and higher education) for individuals with disabilities and at-risk youth served by a national health and human services network. The foundation asked the IRS to bless its procedures under § 4945(g)(3), the category for grants that improve or enhance a recipient's skill or talent. The IRS approved, finding the selection process objective and nondiscriminatory, with conflict-of-interest rules barring grants to insiders and their relatives, direct payment to providers where possible, and recordkeeping and follow-up to confirm the funds are used as intended. As a result, grants made under these procedures will not be taxable expenditures. The approval covers only this program and only so long as the facts do not change substantially.

Ruling snapshot

• Question: Should the IRS grant advance approval of the foundation's educational grant-making procedures under § 4945(g)(3)?
• Outcome: approved
• Key authorities: IRC § 4945(g)(3); Treas. Reg. § 53.4945-4(c)(1); IRC §§ 74(b), 117(a), 170(c)(2)(B)

Full text (IRS public release)

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

Number: 202049006
Release Date: 12/4/2020

Employer Identification Number:
Date: September 8, 2020

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

W = Grant

X = Related Organization
y dollars = amount

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 called W.

The purpose of W is to provide grants to improve or enhance a literary, artistic, musical,
scientific, teaching, academic, athletic, or other similar capacity, skill or talent. Grants will
expand opportunities for individuals with disabilities and at-risk youth and their families
and will fund education and enrichment opportunities such as music or art lessons, sports
league fees and equipment, summer camp, educational lessons, vocational and higher
education, and other programs or experiences that grantees might not otherwise have
access to.

You anticipate awarding _ to grants annually in amounts ranging from y dollars to z
dollars. The applicant pool consists of individuals served by X. X is a national network of
local health and human services providers in more than _ states which offers an array of
services for the youth, elderly, and those with disabilities and serious illnesses. W will be
publicized on your website and through X’s social media, senior leadership, state
directors, local case managers, program staff and direct support professionals. The
selection committee for W is comprised of a multi-disciplinary group of X’s leadership and
programmatic staff. They represent a range and depth of experiences and positions as

_ well as geographic locations.

Grantees will be selected according to consideration of the applicant’s educational and
other achievements, demonstration of strength of character or initiative, description of
goals and how the enrichment opportunity will achieve them, and personal
recommendations from teachers, social workers, or foster parents. Grants will be
awarded based on an objective and nondiscriminatory selection process and not be
based in any way upon the race or employment status of the applicant or any relative of
the applicant. Relatives of members of the selection committee, or of officers, directors,
and substantial contributors of or to you are not eligible for W. Grants will not be made to
anyone who is a disqualified person with respect to you, your employees, members of the
selection committee, your board of directors, or relatives of members of the selection
committee or your board of directors.

Whenever possible, you will pay grants directly to the provider for the enrichment activity
to ensure funds will be used for intended purposes. Otherwise, payments will be made as
reimbursements to the grantee with evidence of receipts. Your grant award letter will
request verification of participation in the activity.

You will maintain the following records for W:

• Information used to evaluate the qualifications of potential grantees, including
written applications and recommendations

• Identification of the grantees and amounts and purposes of each grant, including
minutes of selection committee and board meetings, copies of award letters, and
financial records

• All grant reports and other follow-up data obtained in administering W, including
receipts, questionnaires, feedback from grantees, and reports received from
completed grant activities

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 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 diversions from
occurring.

Letter 4779 (10-2012)
Catalog Number 58222Y

You represent that you will maintain the following: (1) all records relating to individual
grants including information to evaluate grantees, (2) identify 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
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

Letter 4779 (10-2012)
Catalog Number 58222Y

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