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"Directly for the conduct of exempt activities"

Directly for the active conduct of exempt activities refers to qualifying distributions a foundation makes that are used to conduct ex­empt activities by the foundation itself, rather than by or through grantee organi­zation(s) that receive the distributions.

Grants to other organizations to help them conduct their activities are an indirect, rather than direct, means of carrying out the foundation's exempt purpose of the private foundation, even though the activities of the grantee organization may further the exempt activities of the grantor foundation.

Amounts paid to buy or maintain assets used directly in the conduct of the foundation’s exempt activities, such as the operating assets of a museum, public park, or historic site, are direct expenditures for the active conduct of the foundation’s exempt activities. Likewise, admin­istrative expenses (such as staff salaries and traveling expenses) and other operating costs necessary to conduct the foundation’s exempt activities (regardless of whether they are directly for the active conduct of exempt activities) are treated as qualifying distributions expended di­rectly for the active conduct of exempt activities if the expenses and costs are reasonable in amount.

However, administrative expenses and oper­ating costs that are not for exempt activities, such as expenses in connection with the pro­duction of investment income, are not qualifying distributions.  Expenses for both ex­empt and non-exempt activities will be allocated to each activity on a reasonable and consistently applied basis.

An amount set aside by a foundation for a specific project, for example to buy and restore or build additional buildings or facilities that are to be used by the foundation directly for the active conduct of the foundation’s exempt activi­ties, will be treated as qualifying distributions expended directly for the active conduct of the foundation’s exempt activities if the set-aside meets the requirements described in Set asides.

Payments to individuals.  If a foundation awards grants or scholarships, or makes other payments to individuals (including program-related investments) to support active programs to carry out its exempt purpose, the payments will be treated as qualifying distributions made directly for the active conduct of exempt activities only if the foundation maintains some significant involvement in the programs.

A foundation will be considered as maintain­ing a significant involvement in grant-making if:

  1. The foundation operates as follows:
    a.  An exempt purpose of the foundation is relieving poverty or human distress, and its exempt activities are designed to improve conditions among the poor or distressed or in an area subject to poverty or national disaster (such as providing food or clothing to indigents or residents in a disaster area),
    b.  The foundation makes grants or other payments directly for the exempt purpose without the help of an intervening organization or agency, and
    c.  The foundation has a salaried or volun­tary staff of administrators, researchers, or other personnel who supervise and direct the exempt activities on a contin­uing basis, or
  2. The foundation has developed spe­cialized skills, expertise, or is involved in a particular discipline (such as scientific or medical research, social work, education, or the social sciences).  It has a salaried staff of administrators, researchers, or other personnel who supervise or conduct activities that support the foundation’s work in its particular area of interest.  As part of these ac­tivities the foundation makes grants, schol­arships, or other payments to individuals to encourage their involvement in the foundation’s area of interest and in a segment of the activities the foundation carries on (such as grants under which the recipients, in addition to independent study, attend classes, seminars, or conferences the foundation sponsors or conducts, or grants for social work or scientific research projects under the foundation's general direction and supervision).

Whether grants, schol­arships, or other payments are qualify­ing distributions made directly for the active conduct of the foundation’s exempt activities is determined by the facts and circumstances of each particular case.  The test is a quali­tative one.  If the foundation maintains a signifi­cant involvement (as defined earlier), it will not fail to qualify just because more of its funds are devoted to grants, scholarships, or other payments than to the active programs that such grants, scholarships, or other payments sup­port.

If, however, a foundation does no more than select, screen, and investigate applicants for grants or scholarships, under which the recipi­ents perform their work or studies alone or ex­clusively under the direction of another organization, the grants or scholarships will not be treated as qualifying distributions made di­rectly for the active conduct of the foundation’s exempt activities.  The administrative expenses of screening and investigating (as opposed to the grants or scholarships themselves) may be treated as qualifying distributions made directly for the active conduct of the foundation’s exempt activities.

Only private operating foundations may treat the payment of the tax on net investment income as a qualifying distri­bution made directly for the active conduct of activities constituting the foundation’s exempt purpose.


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Page Last Reviewed or Updated: 28-Aug-2014