Advance approval of a foundation's leadership-development fellowship procedures under section 4945(g)(3)

Plain-English summary

A private foundation asked the IRS to pre-approve how it awards educational grants, which private foundations must do under section 4945(g) to avoid an excise tax on grants to individuals. The foundation runs a fellowship: it gives a one-time stipend plus a year of leadership development and mentoring to local nonprofit and grassroots leaders from underserved communities who work in youth-related fields such as youth education, behavioral health, juvenile justice, or child welfare. The stipend covers costs (childcare, food, housing, transportation, and similar) that can be barriers to a fellow's growth, and fellows work with a facilitator, join group sessions, and file progress and expense reports. The IRS approved the procedures under section 4945(g)(3), so the grants are not taxable expenditures. Grants may be paid to the fellow or to the fellow's public-charity employer, insiders are excluded, and the approval carries the usual recordkeeping and reporting conditions.

Ruling snapshot

• Question: Do a foundation's fellowship (leadership-development educational grant) procedures qualify for advance approval under section 4945(g)(3)?
• Outcome: Approved.
• Key authorities: IRC § 4945(g)(3); Treas. Reg. § 53.4945-4(c)(1); IRC §§ 117, 74(b), 170(b)(1)(A)(ii), 170(c)(2)(B).

Full text (IRS public release)

                              Department of the Treasury          Date:
                              Internal Revenue Service            12/07/2022
                              Tax Exempt and Government Entities  Taxpayer ID number:
IRS  P.O. Box 2508
     Cincinnati, OH 45201                                         Person to

Release Number: 202309020
Release Date: 3/3/2023

LEGEND                                                            UIL: 4945.04-04
D = date

W = county/state

X = fellowship

y dollars = amount

Z = number

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 X, to provide individuals within W a one-time stipend and access to your
leadership development/mentoring program for one year.

The purpose of X is to allow the recipient to develop leadership skills and enhance leadership effectiveness,
through both participation in an individualized educational program coordinated by you, and other leadership
developing activities to be chosen by the Fellow. Your goal is to support local leaders originating in
underserved communities in professional and career growth and create a cohort of leaders working in the realm
of youth and related systems.

You will publicize the existence of X through your website, social media platforms on which you participate,

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


and direct contact with other local non-profit organizations.

X is a one-time grant of approximately y dollars, paid in single or multiple installment(s) within a single year.
The stipend will defray costs that serve as barriers to each Fellow's personal leadership capacity. You expect to
provide roughly Z grants annually.

X will include both individual and group leadership development components. Fellows will work independently
with an expert facilitator, participate in quarterly group sessions, engage in discussions resolving barriers to
leadership, and have access to coaching and advises from experienced leaders.

To be eligible for X an applicant must reside within W and work for local nonprofits or grass roots
organizations in the area of youth , or the adjacent areas of youth education, behavioral health,
juvenile justice, or child welfare.

Applicants must submit a written application and provide one or more letters of support from their
organizational leaders demonstrating the organization's support of the applicant as a candidate.

Grants are paid either (1) directly to the grantee, or (2) to the grantee's employer, only if such employer is a
Section 501(c)(3) organization that is a "public organization" within the meaning of Section 53.4945-5(a) of the
Treasury Regulations. In either case, the grants will be subject to all requirements set forth in the Grantmaking
Guidelines adopted by your Board of Trustee on D.

You have developed the following selection criteria designed to identify individuals who will most effectively
utilize your resources to further their careers.

Does the Fellow :

¢ Serve as a " " for a community or program of work, with a demonstrated ability to pull
together ideas, consensus, and action in service of the common good?

* Stand on the threshold of a "breakthrough point," that is, have a vision that the Fellow can quickly develop and
realize, if given sufficient resources?

¢ Conduct work in the community that will serve as an effective vehicle for strengthening the Fellow's skills in
leadership, consensus building and collaboration?

¢ Show motivation to action by a passion for community benefit, not private gain?

¢ Learn openly from achievements and mistakes?

¢ Consistently make ethical choices in the face of pressure or opportunity to do otherwise.

¢ Show courage in expressing beliefs through words and actions?

* Approach others with respect and build trust by communicating honestly and constructively?

* Balance work with commitments to friends and family?

¢ Demonstrate a capacity to grow, overcome obstacles and make significant contributions to community
building?

Your Board of Trustees will elect a selection committee which will include your staff, community nonprofit
leaders, and young people who have been homeless in the past. Your trustees or senior management staff will
not form a major part of the selection committee. You will ensure members of the selection committee will
bring broad experience and expertise to the selection process. The committee will submit a list of finalists for
consideration by your Executive Director and Board of trustees to make final selections. You will notify the
award recipients by an award letter along with its terms and conditions.

Each recipient shall provide a brief initial development report summarizing the award recipient's progress

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

toward the program and goals set out in the application. Each recipient is also required to submit expense report
no later than months after any disbursement of award. The permissible expenses include, but are not limited
to, childcare, food, housing, transportation, education, additional coaching, and medical expenses. These reports
must be received prior to the disbursement of any unpaid portion of the grant.

The recipients must submit final development reports detailing their accomplishments through X and a final
expense report explaining how the funds were used.

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.

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

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.

* 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.

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 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