IRS grants advance approval of a foundation's teacher-fellowship grant procedures under 4945(g)(3)

Plain-English summary

A private foundation asked the IRS to bless the procedures it uses to award educational grants to individuals. This approval matters because section 4945 hits a private foundation with an excise tax on "taxable expenditures," and a grant to an individual for study or similar purposes counts as a taxable expenditure unless the foundation gets the IRS to approve its grant-making procedures in advance under section 4945(g). Here the foundation runs a four-year fellowship program for math and science teachers in a set of public schools, paying a larger annual stipend to established teachers and a smaller one to teachers early in their careers, so recipients can attend and run workshops, seminars, and classes; the aim is to retain teachers and deepen their knowledge. Any K-12 teacher in the area can apply, the program is publicized broadly, and a committee of staff and teaching experts selects fellows through an application and interview process using objective criteria. The foundation committed to the standard oversight (annual reports, investigating and recovering diverted funds, recordkeeping) and to not making grants to insiders or their relatives. The IRS approved the procedures as meeting section 4945(g)(3) and Treas. Reg. § 53.4945-4(c)(1), so grants made under them will not be taxable expenditures. The approval covers this program (and materially similar future ones) as long as the facts don't change substantially.

Ruling snapshot

• Question: Do the foundation's procedures for awarding teacher-fellowship educational grants qualify for advance approval under IRC § 4945(g)(3), so the grants are not taxable expenditures?
• Outcome: Approved
• Key authorities: IRC § 4945(d)(3), (g)(3); Treas. Reg. § 53.4945-4(c)(1); IRC §§ 117(a), 170(b)(1)(A)(ii), 170(c)(2)(B)

Full text (IRS public release)

(Scanned document; OCR-proofread. Obvious scan misreads were corrected; wording is preserved verbatim. LEGEND for redacted items: B = Location of Grant Recipients, c dollars = Grant for Established Teachers, d dollars = Grant for Newer Teachers, e = Grants Given per Year, f = Number of Workshops.)

Department of the Treasury
Internal Revenue Service                                   Date: 11/09/2022
IRS Tax Exempt and Government Entities
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 202305019
Release Date: 2/3/2023

LEGEND                          UIL: 4945.04-04
B = Location of Grant Recipients
c dollars = Grant for Established Teachers
d dollars = Grant for Newer Teachers
e = Grants Given per Year
f = Number of Workshops

Dear     :

You asked for advance approval of your educational grant procedures under Internal Revenue Code (IRC)
Section 4945(g)(3).

This approval is required because IRC Section 4945 provides for the imposition of taxes on each taxable
expenditure of a private foundation. IRC Section 4945(d)(3) provides that the term "taxable expenditure"
includes any amount paid or incurred by a private foundation as a grant to an individual for travel, study, or
similar purposes by the individual, unless the grant satisfies the advance approval requirement of IRC Section
4945(g).

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 IRC Section 4945(g)(3). As a result, expenditures you make
under these procedures won't be taxable.

Description of your request
Your letter indicates you will operate a fellowship program for math and science teachers in B public schools.
Your program provides a c stipend each year for four years to established teachers or d stipend for teachers in
the beginning of their career. The purpose of your program is to better retain teachers and expand their
knowledge. Funds are used by the recipients to provide and participate in workshops, seminars and classes.

The applicant will be any teacher in B for grades K-12. The program will be publicized on your website, by
printed and online ads, and radio announcements. You expect to provide e fellowships per year.

The recipients will be selected by a committee comprised of your staff members and experts in teaching. The
committee will base their decision after an application and interview process. They will rank the applicants on
their knowledge within their field, their knowledge of teaching, and their ability to understand students.

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T

The fellows are required to be active in the community and attend at least f workshops per year. You will
maintain a database documenting the number of workshops each fellow attends along with surveys prepared by
the fellows showing their current status and the work they conduct at your program.

You represent that you will complete the following:

* Arrange to receive and review grantee reports annually and upon completion of the purpose for which the
  grant was awarded,
* Investigate diversion of funds from their intended purposes,
* Take all reasonable and appropriate steps to recover the diverted funds and ensure other grant funds held by
  a 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 diversion from occurring.

You also represent that you will:

* Maintain all records relating to individual grants including information obtained to evaluate grantees,
* Identify a grantee is a disqualified person,
* Establish the amount and purpose of each grant, and
* Establish that you undertook the supervision and investigation of grants described above.

Basis for our determination
IRC Section 4945 imposes excise taxes on the taxable expenditures of private foundations. 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 the following requirements of IRC Section 4945(g) is not a taxable expenditure.

* The foundation awards the grants 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 IRC Section 117(a) and is to be used for study at an educational
    organization described in IRC Section 170(b)(1)(A)(ii); or
    - A prize or award subject to the provisions of IRC 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:

* 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 only covers 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.

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T

* The effective date of our approval is       , which is the date your request was submitted.
* This determination applies only to you. It may not be cited as a precedent.
* You cannot rely on the conclusions in this letter if the facts you provided have changed substantially.
  You must report any significant changes to your program to the IRS at:

  Internal Revenue Service
  Exempt Organizations Determinations
  TE/GE Stop 31A Team 105
  P.O. Box 12192
  Covington, KY 41012-0192

* You can't award 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 further the purposes of your
  organization. You cannot award grants for a purpose that is inconsistent with IRC 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'll make this determination letter available for public inspection after deleting personally identifiable
information, as required by IRC Section 6110. We've enclosed Letter 437, Notice of Intention to Disclose -
Rulings, and a copy of the letter that shows our proposed deletions.

* If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us.
* If you agree with our deletions, you don't need to take any further action.

Please keep a copy of this letter in your records.
If you have questions, you can contact the person shown at the top of this letter.

Sincerely,
Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Letter 437

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T