IRS approves a private foundation's grant procedures for teacher-retention educational grants

Plain-English summary

A private foundation asked the IRS to approve, in advance, the way it plans to
hand out educational grants to individuals. Private foundations normally owe an
excise tax on grants to individuals for study or similar purposes unless the IRS
signs off on the selection procedures first (IRC Section 4945(g)). The
foundation's program aims to keep public school teachers in one state (whose
education system it says ranks near the bottom nationally) by giving them grants
they can use to pay down student loans, buy classroom supplies, or pursue further
training. The IRS approved the procedures, so grants made under them will not be
treated as taxable expenditures. This is a routine advance approval: it matters
because without it, the foundation would face a penalty tax on every such grant.

Ruling snapshot

• Question: Do the foundation's educational-grant award procedures meet the advance-approval requirements of IRC Section 4945(g)(3)?
• Outcome: Approved
• Key authorities: IRC § 4945(g)(3); IRC §§ 117(a), 170(b)(1)(A)(ii), 74(b); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

Internal Revenue Service
Tax Exempt and Government Entities
P.O. Box 2508
Cincinnati, OH 45201

Department of the Treasury

Date: 06/12/2023

Taxpayer ID number:

Person to contact:
Name:
ID number:
Telephone:

Number: 202336034
Release Date: 9/8/2023
UIL: 4945.04-04

LEGEND
B = State
C = Number
F = Number
g dollars = $

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 grant program intended to improve the teaching ability of classroom teachers and to encourage teachers to continue teaching in B.

You state that education in B, as a whole, is at the bottom of U.S. rankings. The purpose of the grant is to encourage public school classroom teachers to continue teaching in the State of B.

The number of grants will vary each year depending on your financial ability and the number of grant request you receive. However, you estimate that you will provide F grants per year. The teachers may only receive one grant per year and the grant is not renewable. But the teacher can apply for additional grants in future years. The grants may be used by teachers to pay off student loan debt, purchase classroom supplies or teaching resources, complete additional training, or professional development, and for other purposes approved by you that will encourage teachers to stay in the teaching profession in B.

You will publicize the program by informing the appropriate officials of certain public-school districts located in B.

To be eligible for a grant, individuals must be public school teachers in B. You will accept individual applications from teachers indicating a specific need for the grant.

You will select recipients based on published criteria, such as the following: conclusions as to the candidate's motivation, character, ability, potential, and/or need, based on a written application or other method determined by you; and recommendations from third parties.

Your Board will determine who is on the selection committee.

To supervise the grants that are awarded, you will require the recipient to enter into an expenditure responsibility agreement. You will also require the recipient to furnish reports at least annually to show how the grant funds were used. If you encounter a situation in which a recipient violates the terms of the grant, you will withhold any future payments while you investigate the potential violation. If you determine that the grant has been used for improper purposes, you will take reasonable steps to recover the grant funds that were used improperly and withhold any future payments.

Relatives of members of the selection committee, or your officers, directors or substantial contributors are not eligible for grants.

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.

• 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