7.27.19  Taxable Expenditures of Private Foundations (Cont. 1)

7.27.19.5 
IRC 4945(d)(3) Grants to Individuals

7.27.19.5.8 
Grant Making Procedures — Advance Approval

7.27.19.5.8.6  (02-22-1999)
Employer-Related Emergency Funds Programs

  1. A company controlled private foundation often provides grants or loans to employees in "emergency" circumstances. For example, funds are sometimes provided for employees who:

    1. suddenly incur extraordinary medical expenses on their own behalf or on behalf of members of their families;

    2. experience emergencies arising from natural disasters such as hurricanes, tornadoes, fires, floods, or earthquakes not covered by insurance or other resources. In the past, public notices, such as Notice 92–45, 1992–2 C.B. 375 (Organizations Providing Relief to Victims of Hurricanes Andrew and Iniki) and Notice 93–41, 1993–2 C.B. 332 (Organizations Providing Relief to Victims of the Midwest Floods) provided relaxation from strict adherence to the Chapter 42 requirements imposed on private foundations during national disaster situations;

    3. suffer physical injuries or financial losses by way of being victims of violent crimes that are not covered by insurance or other resources; and

    4. need funds for funeral or burial expenses.

  2. Company controlled private foundations providing the above benefits have been asking for rulings that expenditures made for the above purposes are not taxable expenditures under IRC 4945 (as well as qualifying distributions under IRC 4942). These issues are currently under consideration. Cases with these issues should be referred to Director, Rulings and Agreements.

7.27.19.5.9  (02-22-1999)
Grants Constituting Scholarship, Prize or Achieving a Specific Objective

  1. In addition to satisfying the IRC 4945(g) requirements of objective and nondiscriminatory basis (see discussion in section IRM 7.27.19.5.7.1) and grant procedures approved in advance (see discussion section 7.27.19.5.7), a grant described in IRC 4945(d)(3) must satisfy either of the following two requirements in order not to be a taxable expenditure.

    1. It constitutes a scholarship, fellowship, prize, or award under IRC 4945(g)(1) or (2). See IRM 7.27.19.5.1(2) for definition of scholarships, prizes, etc.

    2. The purpose of the grant is to achieve a specific objective, produce a report or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee.

  2. Scholarship or fellowship grants, including amounts which are allocated for room and board and thus not excluded from income under IRC 117, and used for study at an educational institution described in IRC 170(b)(1)(A)(ii), will not be taxable expenditures under IRC 4945. See IRC 4945(g)(1).

  3. If a IRC 4945(d)(3) grant does not constitute either a scholarship, fellowship or prize, it may still satisfy IRC 4945(g) as a grant made for a "specific objective." Two revenue rulings illuminate this requirement.

    1. In Rev. Rul. 77–44, 1977–1 C.B. 355, a private foundation made scholarship grants to students who planned to teach in the public schools. However, the private foundation did not require such future services for the students to receive the scholarship grants. The grants were made on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the Service. Since the grants were awarded to recipients who pledged (though not obligated) to render future services, the scholarship grants were not IRC 117(a) scholarships described in IRC 4945(g)(1) and, thus, were not excluded from classification as taxable expenditures. However, since the grants were made to attract students to be public school teachers as well as to improve the recipients’ teaching skills, they were made for the specific objective of improving public education and for the improvement of the recipients’ teaching skills. Thus, the scholarship grants qualified as grants under IRC 4945(g)(3) and were not taxable expenditures. See also Beneficial Foundation v. United States, 85–2 U.S.T.C. 9601 (Cl. Ct. 1985)

    2. In Rev. Rul. 77–434, 1977–2 C.B. 420, a private foundation made long-term, low-interest educational loans to students. The recipients were required to use the loans at a specific educational institution described in IRC 170(b)(1)(A)(ii). Although the loans were not scholarships or prizes, the educational loans were made to further the education of the recipients and were narrow and definite so as to ensure the use of the loans for IRC 501(c)(3) purposes. Thus, the educational loans qualified as grants described in IRC 4945(g)(3).

7.27.19.6  (02-22-1999)
Grants to Organizations IRC 4945(d)(4)

  1. Prior to the Tax Reform Act of 1969 many private foundations had awarded grants to organizations, including other private foundations, without taking any precautions to ensure the proper use of funds or to recover funds in the event of misuse. In many cases, grantee organizations had diverted funds designated for charitable purposes to nonexempt purposes. Congress enacted IRC 4945(d)(4) to curb these abuses.

  2. Under IRC 4945(d)(4) the term "taxable expenditure" includes any amount that a private foundation pays or incurs as a grant to an organization other than a public charity described in IRC 509(a)(1), (2), or (3), unless the grantor foundation exercises "expenditure responsibility" with respect to the grants. The requirements of expenditure responsibility are described in IRC 4945(h) and are discussed below at IRM 7.27.19.6.4.

7.27.19.6.1  (02-22-1999)
Grants Defined

  1. The term "grants" is broadly defined for the purposes of IRC 4945.

    1. IRC 4945(d)(4) grants include payments to other exempt and nonexempt organizations for use in carrying out either the grantor’s or grantee’s exempt purposes.

    2. Grants may be for capital endowment, for the purchase of capital equipment, or for the general support of the grantee organization’s activities.

    3. Grants may include loans for IRC 170(c)(2)(B) purposes and "program related investments," such as investments in small businesses that assist in neighborhood renovation. See Reg. 53.4945–4(a)(2).

  2. Conversely, IRC 4945(d)(4) grants do not include payments for consultant and personal services in assisting an exempt organization in planning, evaluating, or developing program activities. See IRM 7.27.19.5.1(3) for a detailed discussion.

7.27.19.6.2  (02-22-1999)
Grants to Public Charities, Exempt Operating Foundations, and Certain Other Organizations

  1. Generally, grants made by a private foundation to public charities that are described in IRC 509(a)(1), (2), or (3) and exempt operating foundations described in IRC 4940(d)(2) do not constitute taxable expenditures, even if the private foundation does not exercise expenditure responsibility over the grants as described in section IRM 7.27.19.6.5 below. These entities include:

    1. churches, schools, hospitals, governmental units, certain organizations related to colleges and universities and publicly supported organizations described in IRC 170(b)(1)(A) (see IRC 509(a)(1));

    2. organizations which normally receive more than one-third of their support from gifts, membership fees, etc., and not more than one-third of their support from gross investment income and unrelated business income (see IRC 509(a)(2); and

    3. organizations operated solely for the benefit of, or in connection with, one or more of the organizations described in (a) or (b) above (for a detail discussion of these public charities, see IRM 7.26.2, IRM 7.26.3, and IRM 7.26.4 of the Private Foundations Manual).

    4. exempt operating private foundations that are described in IRC 4940(d)(2). For a detailed discussion of exempt operating private foundations, see IRM 2.27.14 (concerning the IRC 4940 taxes).

  2. Grants made to certain organizations are treated as grants made to IRC 509(a)(1) organizations and, therefore, are not taxable expenditure. These organizations include:

    1. organizations described in IRC 170(c)(1), IRC 511(a)(2)(B) or Reg. 1.509(a)–2(a);

    2. foreign governments, their agencies or instrumentalities, or international organizations designated as such by Executive Order under 22 U.S.C. 288, even if not described in IRC 501(c)(3); and

    3. instrumentalities of a domestic political subdivision of a state. See Rev. Rul. 81–125, 1981–1 C.B. 515.

    Note:

    However, grants made to these organizations must be used for charitable purposes described in IRC 170(c)(2)(B). See Reg. 53.4945–5(a)(4).

  3. Native American tribal governments are treated as state governments and, therefore, are described in IRC 170(c)(1) for purposes of subchapter A of chapter 42. IRC 7871(a)(7)(B).

7.27.19.6.3  (02-22-1999)
Grants to Foreign Organizations

  1. Many foreign organizations do not have rulings or determination letters to show that they are described in IRC 501(c)(3) or 509(a)(1), (2), or (3). Hence, grants they received from private foundations may be taxable expenditures under IRC 4945(d)(4) or IRC 4945(d)(5). These grants are not taxable expenditures if a foreign organization meets two tests.

    1. The first test, in Reg. 53.4945–6(c)(2)(ii), concerns foreign grantee organizations that do not have IRC 501(c)(3) rulings. Generally, a foreign organization will be treated as akin to a IRC 501(c)(3) organization if in the "reasonable judgement" of a foundation manager of the grantor private foundation, the grantee foreign organization is organized and operated as a IRC 501(c)(3) organization. Reasonable judgement is defined by its generally accepted legal sense within the outlines developed by judicial decisions in the law of trusts. This test does not apply to "testing for public safety" organizations described in IRC 501(c)(3) and 509(a)(4).

    2. The second test, in Reg. 53.4945–5(a)(5), provides that if a grantor private foundation makes a "good faith" determination that the foreign grantee organization is described in IRC 509(a)(1), (2), (3), such grants made to that foreign organization are considered to have been made to an organization described in the aforementioned Code sections. The good faith determination must be based upon an affidavit of the grantee foreign organization or an opinion of counsel (of the grantor or grantee), either of which must set forth sufficient facts concerning the operations and support of the grantee foreign organization to demonstrate that it would likely qualify as an organization described in IRC 509(a)(1), (2) or (3).

  2. Rev. Proc. 92–94, 1992–2 C.B. 507, provides that a private foundation may base its reasonable judgment and good faith determination, as required by the tests above, upon an affidavit of the foreign grantee, which was prepared for another foundation. Thus, under the revenue procedure, a foreign grantee does not have to prepare a new affidavit for each grant. The affidavit must be currently qualified. An affidavit is considered to be currently qualified if its facts are up to date.

7.27.19.6.4  (02-22-1999)
Earmarked Grants

  1. Occasionally, a private foundation makes a grant to another organization in order to enable that recipient to make grants to other grantee organizations (secondary grantees). In such a case, the private foundation is not regarded to have made the grant to the secondary grantees if the private foundation does not earmark the use of the grant for any named secondary grantees. Also, there does not exist an oral or written agreement whereby the grantor private foundation may cause the selection of the secondary grantee by the organization to which it has given the grant. See Reg. 53.4945–5(a)(6).

  2. If a grantor private foundation has reason to believe that certain secondary organizations would derive benefits from its grant to the initial grantee organization, such grant still would be considered as a grant to that organization (and not to the secondary grantee organizations) so long as the initial grantee organization —

    1. exercises control over the selection process and

    2. makes the selection completely independent of the grantor private foundation.

7.27.19.6.5  (02-22-1999)
Expenditure Responsibility

  1. A private foundation must maintain expenditure responsibility over grants it made to organizations (other than IRC 509(a)(1), (2) and (3)) for the grants not to be taxable expenditures. That private foundation will be considered to be exercising expenditure responsibility under IRC 4945(h) if it meets three requirements. The private foundation must:

    1. take certain precautions to ensure that the grant funds will be spent for proper purposes (in connection with this requirement the foundation must conduct a pre-grant inquiry concerning potential grantees and make all its grants subject to a certain type of written agreement with the grantee);

    2. obtain full and complete reports from the grantee concerning the use of funds;

    3. submit full and detail reports describing its expenditures to the Service.

  2. A private foundation must strictly comply with these requirements.

    • For example, in Hans S. Mannheimer Charitable Trust v. Comm., 93 T.C. 35 (1989), a private foundation made grants to two other private foundations. All three had been established by the same person and had offices and trustees in common. The grantor private foundation made several grants to the two other private foundations, but failed to obtain annual reports from them as required by IRC 4945(h)(3). Nevertheless, the grantor was informed of the activities of the grantee organizations. The Tax Court concluded that the grantor failed to exercise expenditure responsibility requirements even if it was informed of the activities of the recipients.

  3. Partial transfers of assets from one private foundation to another, pursuant to IRC 507(b)(2), requires that the transfer or foundation exercises expenditure responsibility. See Reg. 1.507-3(a)(9)(iii), Example (2); also IRM 7.26.7 (concerning termination of private foundation status).

7.27.19.6.6  (02-22-1999)
Pre-grant Inquiry Requirement IRC 4945(h)(1)

  1. Before a private foundation makes a grant to an organization subject to expenditure responsibility, it should conduct a limited pre-grant inquiry to ensure that the grant will be used for proper purposes. See Reg. 53.4945–5(b)(2)(i).

  2. The pre-grant inquiry should concern itself with matters such as:

    1. the identity, prior history, and experience of the grantee organization and its managers;

    2. whether the grantee has a history of compliance or noncompliance with the terms of previous grants, and any knowledge concerning the management, activities, and practices of the grantee organization.

  3. The scope of the pre-grant inquiry will vary in each case depending on —

    1. the size and purpose of the grant;

    2. the period over which it will be paid; and

    3. any prior experience the grantor has had with the grantee. See Reg. 53.4945–5(b)(2)(i).

  4. Ordinarily, no further pre-grant inquiry is necessary where a grantee has properly used all prior grants and filed the required reports. See Reg. 53.4945–5(b)(2)(ii) for examples illustrating the pre-grant inquiry rule.

7.27.19.6.7  (02-22-1999)
Terms of Grant Agreements

  1. Compliance with the expenditure responsibility provisions of IRC 4945(h) will also require the grantor organization to make all IRC 4945(d)(4) grants subject to a written commitment signed by an appropriate officer, director, or trustee of the grantee organization.

  2. The commitment must include provisions:

    1. clearly stating the purposes of the grant. Such purposes may include contributing to capital endowment, purchase of capital equipment, specific program or series of programs, or general support of the grantee organization, provided that neither the grants nor the income thereof may be used for non-IRC 170(c)(2)(B) purposes;

    2. indicating that the grantee organization must repay any funds not used for grant purposes;

    3. indicating that the grantee organization must submit annual reports on the use of funds (unless the grant is to a private foundation for endowment or other capital purposes (see Reg. 53.4945–5(c)(2))), and in which case the reports on use of principal and income will be made the first year and the immediately succeeding two years if it is apparent that funds will be used appropriately. See IRM 7.27.19.6.10(3) below.

    4. indicating that complete records of receipts and expenditures must be maintained, and to make such records available to the grantor. The grantee organization must also agree not to use funds in a manner inconsistent with the provisions of IRC 4945(d)(1) through (5). See Reg. 53.4945–5(b)(3).

7.27.19.6.8  (02-22-1999)
Program-Related Investments

  1. If the purpose of the grant is to make a "program-related investment," (PRI) the written agreement must provide that the funds be used only for the purposes of the investment and to repay any portion thereof not used for such purposes. Such repayment is limited to the extent permitted by applicable law concerning distributions to holders of equity interests. See Reg. 53.4945–5(b)(4).

  2. The grantee organization also must —

    1. submit full and complete annual financial reports for the life of the PRI (at least for grants made to a public charity grantee, see discussion of Charles Steward Mott Foundation v. United States, 938 F.2d 58 (6th Cir. 1991) at IRM 7.27.19.6.11(3); see also IRM 2.27.19.6.10(3) infra);

    2. maintain adequate books and records; and

    3. make such books and records available to the grantor private foundation.

    Note:

    The information in each of these specified items must be in the form ordinarily required by commercial investors under similar circumstances.

  3. The grantee organization must also agree not to use any of the grant funds for the following activities.

    1. It must not carry on propaganda, or otherwise to attempt to influence legislation, within the meaning of IRC 4945(d)(1).

    2. It must not influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive within the meaning of IRC 4945(d)(2); or

    3. In the case of a recipient which is a private foundation, it must not make any grant which does not comply with the requirements of IRC 4945(d)(3) or (4). See Reg. 53.4945-5(b)(4)(iv).

  4. The term "program-related investment" is defined in IRC 4944(c) and Reg. 53.4945–5(b)(3). A program-related investment is an investment whose primary purpose is to accomplish one or more of the purposes described in IRC 170(c)(2)(B), no significant purpose of which is the production of income or the appreciation of property, and no purpose of the investment is to influence legislation or participate in political campaigns. See IRM 7.27.18.4, Taxes on Investments Which Jeopardize Charitable Purposes.

7.27.19.6.9  (02-22-1999)
Grants to Foreign Organizations

  1. If the grant is to a foreign organization, the written grant agreement must impose restrictions which are substantially equivalent to the limitations placed on domestic private foundations by IRC 4945(d). Such restrictions may be phrased in appropriate terms under foreign law or custom and ordinarily will be considered sufficient if an affidavit or opinion of counsel (of the grantor or grantee) is obtained stating that, under foreign law or custom, the agreement imposes restrictions on the use of the grant substantially equivalent to the restrictions imposed on a domestic private foundation. See Reg. 53.4945–5(b)(5).

  2. With respect to activities in foreign countries, the failure of a foreign private foundation that is described in IRC 4948(b) to comply with the grant agreement requirements is not a prohibited transaction under IRC 4948(c). See Reg. 53.4945–5(b)(6).

7.27.19.6.10  (02-22-1999)
Reporting Requirements of the Grantee Organization

  1. IRC 4945(h)(2) provides that the grantor private foundation, in exercising expenditure responsibility, must receive reports from the grantee organization on the use of the grant. The reports, in accordance with Reg. 53.4945–5(c)(1), must show:

    1. how the funds are used in compliance with the terms of the grant, and

    2. the progress made by the grantee in fulfilling the purposes of the grant.

  2. These reports must be submitted at the end of the grantee organization’s annual accounting period during which the first grant is received and all subsequent accounting periods until the grant funds are expended in full or the grant is otherwise terminated. After all the grant funds are spent, a final summary report must be submitted to the grantor.

  3. An exception to the annual reporting requirement is if a grant is made to another private foundation exempt under IRC 501(a) and is used by that grantee private foundation for endowment, capital equipment, or other capital purposes. The grantee private foundation must make reports on the use of principal and income during the year of the grant and the two immediately succeeding taxable years. If at any time thereafter it becomes reasonably apparent to the grantor private foundation that the principal, income or the equipment purchased therefrom has not been used for any purpose other than those permitted under IRC 4945(d), such grantor private foundation may then allow further grantee reports to be discontinued. See Reg. 53.4945–5(c)(2).

  4. The grantor private foundation need not independently verify the reports submitted by the grantee organization unless it has reason to doubt the accuracy or reliability of the reports. See Reg. 53.4945–5(c)(1).

7.27.19.6.11  (02-22-1999)
Reporting Requirements of the Grantor

  1. IRC 4945(h)(3) requires the grantor private foundation exercising expenditure responsibility to submit annual reports to the Service on all grants made. The reports must be submitted on or with the Form 990–PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as a Private Foundation. See Reg. 53.4945–5(d)(1). The grantor private foundation may satisfy its filing requirements with respect to any grant made to a grantee organization by submitting the report received from the grantee organization.

  2. The report must include the following information:

    1. the name and address of the grantee;

    2. the date, amount, and purpose of each grant;

    3. the amounts spent by the grantee organization (based on the most recent report received from the grantee organization);

    4. whether the grantee private foundation has diverted any portion of the funds (or the income therefrom if it is an endowment grant) from the purpose of the grant (to the knowledge of the grantor);

    5. the dates of any reports received from the grantee; and

    6. if the grantor private foundation has been required, pursuant to Reg. 53.4945–5(c)(1), to verify the grantee organization’s reports, the date and results of any such verification must be submitted. See Reg. 53.4945–5(d)(2).

  3. If a grantor private foundation awarded a grant to a private foundation exempt under IRC 501(a) for capital endowment, equipment, or other capital purposes, the grantor foundation need only submit reports for taxable years for which it required reports from the grantee organization. See discussion in IRM 7.27.19.6.8, and 7.27.19.6.10, Regs. 53.4945–5(c)(2) and 53.4945–5(d)(1).

    • An example of a failure of a grantor private foundation to comply with the reporting requirements is illustrated in Charles Stewart Mott Foundation v. United States, 938 F. 2d 58 (6th Cir. 1991). In this case, the private foundation made a 12-year interest-free loan grant for program-related investment purposes to be distributed in equal amounts over 12 years to an organization that was a public charity. The grantor private foundation failed to file an annual report on the loan grant for year 6 and 7 in violation of Reg. 53.4945–5(b)(4)(ii). The Sixth Circuit held that private foundation’s distributions made to the recipient under the loan grant for year 6 and 7 are taxable expenditures. It concluded that, under the expenditure responsibility requirement of IRC 4945(h)(3), the grantor private foundation must file an annual report for every year of the duration of the loan grant. Also, because the recipient was not a private foundation, the grantor private foundation did not qualify for the exception in Regs. 53.4945–5(c)(2) and 53.4945–5(d)(1)to the annual reporting requirement. See paragraph (3) above. See also Rev. Rul. 77–213, 1977–1 C.B. 357 and Hans S. Mannheimer Charitable Trust v. Commissioner, 93 T.C. 35 (July 12, 1989).

7.27.19.6.12  (02-22-1999)
Recordkeeping Requirements of the Grantors

  1. In addition to filing the annual report of its grant-making activities, grantor private foundations are required to retain records with respect to all their expenditure responsibility grants and to make them available to the Service on request. The required records must include a copy of —

    1. each such grant agreement entered into during the taxable year;

    2. each report received from the grantee organization during the taxable year; and

    3. the results of audits or investigations that have been conducted during the year with respect to its "expenditure responsibility" grants. See Reg. 53.4945–5(d)(3).

7.27.19.6.13  (02-22-1999)
Reports Received After the Close of Grantor’s Accounting Year

  1. Data contained in reports received by a grantor private foundation after the close of its accounting year, but before the due date of its Form 990–PF for that year, need not be reported on that return, but may be reported on the grantor’s Form 990–PF for the year in which such reports are received from a grantee organization.

7.27.19.6.14  (02-22-1999)
Violations of Expenditure Responsibility Requirements

  1. Violations of the expenditure responsibility requirements of IRC 4945(h) fall into one of three categories.

    1. The diversion of grant funds by a grantee organization to an improper use.

    2. The grantee organization’s failure to submit complete reports to the grantor.

    3. A failure of the grantor private foundation to take certain expenditure responsibility actions. See Reg. 53.4945–5(e).

7.27.19.6.14.1  (02-22-1999)
Diversion of Grant by Grantee Organization

  1. The diversion of grant funds by a grantee organization to any use not in furtherance of a purpose specified in the grant may result in the diverted portion of the grant being a taxable expenditure under IRC 4945(d)(4). However, the mere use of grant funds for activities not planned in the original budget is not treated as a diversion. The use of the grant funds must actually be inconsistent with the original purposes of the grant as described in the grant agreement. See Reg. 53.4945–5(e)(1).

    • For example, the original budget in a grant agreement provides a schedule of estimated expenditures such as salaries, consultant fees, operating expenses, and other similar expenses. If the actual expenditures for salaries, operating expenses, etc. differ from the estimated expenditures, such deviation is not a diversion of grant funds, assuming the use of the grant funds was consistent with the grant purposes.

  2. The actual rules on diversions of grant funds by grantee organizations are identical to the rules on diversion of individual grants. Read IRM 7.27.19.5.8.2 above for a discussion of the diversion rules, and see Reg. 53.4945–5(e)( 1).

7.27.19.6.14.2  (02-22-1999)
Grantee Organization’s Failure to Submit Reports

  1. If a grantee organization fails to submit an adequate report to the grantor private foundation in accordance with IRC 4945(h)(2), such failure may cause the grant to be a taxable expenditure. However, if the grantor private foundation takes the corrective actions described in (2) below, the grant will not be a taxable expenditure by reason of a grantee organization’s failure to submit adequate reports.

  2. The grantor private foundation must take the following corrective actions:

    1. It must withhold all future payments under the grant or any other grant to the same grantee organization until the delinquent report is submitted;

    2. It must make a reasonable effort to obtain the missing report from the grantee.

  3. If these steps are taken and if the grantor private foundation has otherwise complied with IRC 4945(h), the grant will not be treated as a taxable expenditure. See Reg. 53.4945–5(e)(2); also, see IRM 7.27.19.6.10 for a discussion of the reporting requirements of grantee organizations.

7.27.19.6.14.3  (02-22-1999)
Grantor Violations of IRC 4945(h)

  1. A grant may be a taxable expenditure because the grantor private foundation did not comply with the requirements of IRC 4945(h) by not doing the following:

    1. It failed to conduct an appropriate pre-grant inquiry;

    2. It failed to obtain the required grant agreement from the grantee; or

    3. It failed to file one of the required grantor reports with the Service. See Reg. 53.4945–5(e)(3).

  2. For example, in Rev. Rul. 77–213, 1977–1 C.B. 357, a private foundation failed to include a grant report with the original annual information return but corrected the omission on an amended return that was filed after its due date. The Service held that the untimeliness of the amended return precluded it from nullifying the private foundation’s failure to submit the report with the original return. Hence, the private foundation failed to exercise the expenditure responsibility requirements of IRC 4945(h)(3).

7.27.19.7  (02-22-1999)
Expenditures for Noncharitable Purposes IRC 4945(d)(5)

  1. IRC 4945(d)(5) provides that the definition of "taxable expenditure" includes any amount paid or incurred by a private foundation for any purpose other than one described in IRC 170(c)(2)(B) (this provision serves as a "catch-all" prohibition).

  2. IRC 170(c)(2)(B) purposes include:

    1. religious, charitable, scientific, literary, or educational purposes, or

    2. to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or

    3. for the prevention of cruelty to children or animals.

  3. Thus, any expenditure for a purpose which is not described in IRC 170(c)(2)(B) is a taxable expenditure. See Reg. 53.4945–6(a). Unlike IRC 501(c)(3), which requires expenditures for nonexempt purposes to be more than insubstantial before loss of exemption occurs, IRC 4945(d)(5) imposes liability for excise tax under IRC 4945(a) on any expenditures for nonexempt purposes, whether substantial or not. Thus, a private foundation could be liable for tax under IRC 4945(d)(5) for engaging in an activity which did not further an exempt purpose and yet retain its exempt status under IRC 501(c)(3) because the activity was insubstantial.

7.27.19.7.1  (02-22-1999)
Prohibited Expenditures

  1. Expenditures that are subject to IRC 4945(d)(5) include all payments made to either individuals or organizations for noncharitable purposes. These improper purposes include wrongful distributions, excessive compensation arrangements, and unreasonable payments for goods and services.

    • For example, an unrestricted grant by a private foundation to a cemetery not described in IRC 170(c)(2)(B) is a taxable expenditure under IRC 4945(d)(5). See Rev. Rul. 80–97, 1980–1 C.B. 257.

7.27.19.7.2  (02-22-1999)
Permitted Expenditures

  1. Reg. 53.4945–6(b)(1) describes several types of expenditures which will not be treated as taxable expenditures under IRC 4945(d)(5). They include the following:

    1. expenditures made to acquire investments and related investment expenses (for the purpose of obtaining income or funds to be used in furtherance of purposes described in IRC 170(c)(2)(B));

    2. expenditures made to pay taxes;

    3. expenditures made to pay expenses that qualify as deductions for purposes determining IRC 511 unrelated business income tax;

    4. payments constituting a deduction under IRC 4940 or qualifying distributions under IRC 4942(g);

    5. reasonable expenditures to evaluate, acquire, modify, and dispose of program-related investments; and

    6. business expenditures by the recipient of a program related investment.

  2. For example, concerning a. above, in Rev. Rul. 77–161, 1977–1 C.B. 358, a private foundation made a loan to a disqualified person. The loan was at a reasonable interest rate, adequately secured and met prudent investment standards. The Service concluded that the loan was not automatically a taxable expenditure under IRC 4945(d)(5) even though it was a self-dealing act under IRC 4941.

  3. Conversely, any unreasonable administrative expenses, including salaries, consultant fees, and other fees for services rendered are taxable expenditures under IRC 4945(d)(5) unless the foundation can demonstrate that the expenses were paid or incurred in the good faith belief that they were reasonable and that payment or incurring of such expenses in such amounts was consistent with ordinary business care and prudence. See Reg. 53.4945–6(b)(2).

    • For example, in Kermit Fisher Foundation v. Commissioner, 59 T.C.M. 898 (1990), the sole trustee of a private foundation received annual compensation as much as $45,000 during the tax years under examination. In addition, the private foundation paid the costs of his office, two automobiles, and a computer while its assets during this same tax years never exceeded $211,268. The Tax Court concluded that the trustee’s salary were excessive and unreasonable in view of facts and circumstances. It cited the following facts and circumstances for its conclusion: the trustee kept no records of services performed and time spent thereof, payments of compensation correlated with his personal financial needs and was in irregular amounts, the large amount of the salary received in relation to the private foundation’s small corpus, and the small percentage of money actually donated to charity. As to the other expenditures, the court noted that the rental of office space, purchase of the computer and automobiles were not necessary to the operations and investments of the private foundation. Thus, the Tax Court held that these expenditures were taxable expenditures under IRC 4945(d)(5).

  4. Under certain circumstances, a private foundation may indemnify a foundation manager for expenses incurred in contesting a Chapter 42 tax and in certain state legal proceedings. See Regs. 53.4941(d)–2(f)(3) as to "reasonable administrative expenses" being an IRC 170(c)(2)(B) expense.

    • For example, in Rev. Rul. 82–223, 1982–2 C.B. 301, a private foundation suffered a loss of assets in a transaction involving its foundation manager. The foundation manager’s actions were not willful or without reasonable cause. State officials brought suit against the manager under state laws relating to the mismanagement of funds of charitable organizations. Under an existing indemnification agreement, the foundation proposed to indemnify the manager for attorney fees, court costs, and the amount paid in settlement of the suit from its own assets. The private foundation also proposed to pay the premiums for an insurance policy that would provide liability insurance to its foundation manager for liabilities, including settlement amounts, arising from a state mismanagement proceeding. The premiums paid by the foundation would be treated as part of the compensation paid to the manager. The purchase of insurance for indemnification is a common practice which enables an organization to attract and retain qualified management personnel. Therefore, payments of the premiums for such an insurance policy would not be taxable expenditures within the meaning of IRC 4945(d)(5) and Reg. 53.4945–6(b)(2) because such expenses constitute reasonable administrative expenses and, thus, are incurred for charitable purposes within the meaning of IRC 170(c)(2)(B). Similarly, the payment of attorney’s fees and court costs in connection to the foundation manager’s employment would ordinarily be treated as part of his/her compensation and, if reasonable, would not be an unreasonable administrative expense under Reg. 53.4945–6(b)(2). However, the proposed indemnification of the settlement amount would constitute a payment in satisfaction of the foundation manager’s personal liability. As such, it would primarily benefit the foundation manager, would be unreasonable administrative expense under Reg. 53.4945–6(b)(2) and would constitute an expenditure for a purpose other than one of the charitable purposes specified in IRC 170(c)(2)(B). For a discussion of the treatment of indemnification transactions under IRC 4941, IRC 132, and IRC 61, see IRM 7.27.15 (concerning taxes on self-dealing).

7.27.19.7.3  (02-22-1999)
Grants to Public Organizations Should Not Be Earmarked For Prohibited Activities

  1. A grant made to a public organization that is described in IRC 509(a)(1), (2), or (3) is not a taxable expenditure under IRC 4945(d) if the following requirements are met:

    1. the grant is not earmarked to be used for any activities described in IRC 4945(d)(2) or (d)(5), or that violates IRC 4945(d)(3) or (d)(4); and

    2. there does not exist an oral or written agreement whereby the private foundation may cause the public organization to engage in the prohibited activities. See Reg. 53.4945-2(a)(5); also IRM 7.27.19.4.5 and IRM 7.27.19.6.2.

7.27.19.7.4  (02-22-1999)
Grants to Noncharitable Organizations

  1. Since a private foundation cannot make an expenditure for a purpose other than a purpose described in IRC 170(c)(2)(B), a private foundation may not make a grant to an organization other than an organization described in IRC 501(c)(3) (for a discussion of grants made to foreign organizations, see Section 17.6.3). There are two exceptions to this rule.

    1. If the grant itself constitutes a direct charitable act or the making of an IRC 4944(c) program-related investment, then it is for a purpose described in IRC 170(c)(2)(B) and, hence, not a taxable expenditure. Reg. 53.49456(c)(1)(i); and

    2. The grantor private foundation is reasonably assured that the grant will be used exclusively for purposes described in IRC 170(c)(2)(B). Reasonable assurance is where the grantee organization agrees to comply with the requirements of IRC 4945(d) and the expenditure responsibility requirements of IRC 4945(h) and Reg. 53.4945–5; and to maintain the grant funds in a separate fund described in IRC 170(c)(2)(B). See Reg. 53.4945–6(c)(2)(i).

7.27.19.8  (02-22-1999)
Sanctions Under IRC 4945

  1. IRC 4945 imposes a multi-level tax designed to deter private foundations from making certain expenditures.

    1. On making a taxable expenditure, a first-tier tax is imposed on the private foundation and perhaps the managers.

    2. A severe second-tier tax could be imposed on the private foundation and the managers for refusing to remove the expenditure from being a taxable expenditure.

  2. In addition, repeated willful or flagrant violations of IRC 4945 by a private foundation may result in the termination of its private foundation status as well as the imposition of excise tax thereunder pursuant to IRC 507. Also, the foundation managers may be subject to an excise tax under IRC 6684.

7.27.19.8.1  (02-22-1999)
First-Tier Tax on Private Foundation

  1. A private foundation that made a taxable expenditure described in IRC 4945(d) is subject to an excise tax equal to 10% of the amount of the taxable expenditure. See IRC 4945(a)(1) and Reg. 53.4945–1(a).

7.27.19.8.2  (02-22-1999)
First-Tier Tax on Foundation Managers

  1. If a private foundation has made a taxable expenditure, the managers of a private foundation are subject to a 2-1/2% tax:

    1. if there is an agreement among them to make such expenditure; and

    2. if they know that such expenditure is a taxable expenditure;

    3. provided such agreement is willful and is not due to reasonable cause. See IRC 4945(a)(2) and Reg. 53.4945–1(a)(2).

  2. The first-tier tax applies only to those foundation managers who are authorized to approve, or to exercise discretion in recommending approval of, the making of expenditures by the private foundation. It also applies to those foundation managers who are members of a group, such as its board of directors or trustees, that is authorized to make such expenditures. See Reg. 53.4945–1(a)(2). For the definition of "foundation manager," see IRC 4946(b) and IRM 7.27.20.

7.27.19.8.3  (02-22-1999)
Definition of Agreement

  1. The 2-1/2% tax, as stated above, is imposed on the "agreement" of a foundation manager to make a taxable expenditure. "Agreement" is defined to mean approval and includes any reasonable manifestation of approval.

    • For example, a member of the board of directors who votes in favor of making a taxable expenditure would be considered to have approved of or agreed to the expenditure. See Reg. 53.4945–1(a)(2).

7.27.19.8.4  (02-22-1999)
Definition of Knowing

  1. To be liable for the first-tier tax, a foundation manager must have "known" that the expenditure to which he/she agreed was a taxable expenditure. Knowing is defined as the following:

    1. A foundation manager has actual knowledge of sufficient facts so that, based solely upon such facts, such expenditure would be a taxable expenditure;

    2. He/she is aware that such an expenditure under these circumstances may violate the provisions of federal tax law governing taxable expenditures; and

    3. He/she negligently fails to make reasonable attempts to ascertain whether the expenditure is a taxable expenditure, or he/she is in fact aware that it is such an expenditure. See Reg. 53.4945–1(2)(iii).

  2. "Knowing" does not mean "having reason to know," but rather actual knowledge in determining whether a foundation manager is liable for tax. For example, a foundation manager would have "knowledge" if he/she has sufficient understanding of the facts and law involved that the expenditure would be a taxable expenditure. See Reg. 53.4945–1(a)(2)(iii).

  3. The burden of proof is upon the Service to show knowledge. See IRC 7454(b) and Reg. 53.4945–1(a)(2)(viii).

7.27.19.8.5  (02-22-1999)
Definition of Willful

  1. The foundation manager’s agreement to a taxable expenditure must also be "willful" in order for him/her to be liable for the first-tier tax under IRC 4945(a)(2). Willful is defined as voluntary, conscious, and intentional. See Reg. 53.4945–1(a)(2)(iv).

  2. Motive to avoid the restrictions of the law or tax liability is not required in order to show that an agreement willful. However, a foundation manager’s agreement to a taxable expenditure is not willful if he does not know that it is a taxable expenditure.

7.27.19.8.6  (02-22-1999)
Due to Reasonable Cause

  1. A foundation manager is not liable for the 2-1/2% first-tier tax if his/her agreement to make the taxable expenditure is due to reasonable cause. Reasonable cause is where the foundation manager exercises ordinary business care and prudence on behalf of the private foundation. See Reg. 53.4945–1(a)(2)(v).

    • An example of "reasonable cause" is where a foundation manager made a taxable expenditure based on the advice of counsel. See below for discussion of Advice of Counsel; see also United States v. Boyle, 469 U.S. 241 (1985) for general discussion on "reasonable cause."

7.27.19.8.7  (02-22-1999)
Advice of Counsel

  1. The advice of counsel defense must have the following requirements:

    1. A foundation manager must make a full disclosure of the factual situation to legal counsel (including house counsel);

    2. He/she relies on the advice of such counsel that an expenditure is not a taxable expenditure under IRC 4945;

    3. The advice of legal counsel must be expressed in a reasoned written legal opinion. A reasoned opinion is where it addresses the facts, the applicable law and based upon the aforementioned, the expenditure is not a taxable expenditure. However, a written legal opinion is not "reasoned" if it does nothing more than recite the facts and express a conclusion. See Reg. 53.4945–1(a)(2)(vi).

  2. If these requirements are satisfied, even though such expenditure is subsequently held to be a taxable expenditure, the foundation manager’s agreement to make such expenditure will not be considered "knowing" or "willful" and will be considered "due to reasonable cause" within the meaning of IRC 4945(a)(2). See Reg. 53.4945–1(a)(2)(vi). See, also Burruss Land And Lumber Co.. Inc. v. United States, 349 F. Supp. 188 (W.D. 1972), which held that reliance upon advice of legal counsel or accountant constituted reasonable cause for failure to file federal excise tax return.

  3. Absence of advice of counsel with respect to an expenditure will not, by itself, give rise to any inference that a foundation manager’s agreement to the make a taxable expenditure is knowing, willful, or without reasonable cause. See Reg. 53.4945–1(a)(2)(vi).

7.27.19.9  (02-22-1999)
Second-Tier Taxes

  1. The second-tier taxes imposed by IRC 4945(b) are designed to induce private foundations and their managers to promptly correct any improper expenditures. If a private foundation fails to correct a taxable expenditure within the correction period, both the foundation and those managers who fail to agree to the corrective action will be liable for these taxes.

7.27.19.9.1  (02-22-1999)
Second-Tier Taxes on Private Foundations

  1. IRC 4945(b)(1) imposes on a private foundation an additional excise tax equal to 100% of the amount of the taxable expenditure if it failed to correct the taxable expenditure within the taxable period. The second-tier excise tax must be paid by the private foundation.

7.27.19.9.2  (02-22-1999)
Second-Tier Taxes on Foundation Managers

  1. IRC 4945(b)(2) imposes a tax on any foundation manager an additional excise tax equal to 50% of the amount of the taxable expenditure if two conditions exist:

    1. The second-tier tax has been imposed on the foundation pursuant to IRC 4945(b)(1); and

    2. That foundation manager refuses to agree to correct the expenditure so that it is not a taxable expenditure.

  2. This tax on foundation managers is imposed on the failure to agree to correct an expenditure rather than the failure to correct. Hence, only those foundation managers who refused to correct the expenditure are subject to the tax. Also, the second-tier excise tax must be paid by the foundation managers.

  3. The imposition of the IRC 4945(a)(2) first-tier tax on foundation managers is not a prerequisite for the imposition of the second-tier tax. The only conditions needed to trigger the imposition of the second-tier tax are the two aforementioned requirements described in (1).

  4. A request for correction can be made by a fellow foundation manager or the Service.

    1. If it is the latter, according to Thorne v. Commissioner, 99 T.C. 67 (1992), the Service must make a formal written request to the foundation manager to make the correction.

    2. Otherwise, according to Thorne, the foundation manager cannot be considered as having refused to make the correction. See IRM 7.27.19.9.3 and IRM 7.27.19.9.3.1, infra, for discussion of method of correction.

  5. The written request for correction must be made within a reasonable period of time prior to the issuance of a statutory notice of deficiency for the second-tier tax of IRC 4945(b).

7.27.19.9.3  (02-22-1999)
Correction of Taxable Expenditures and Second-Tier Taxes

  1. The purpose of correction is to permit a private foundation and its managers to take all reasonable steps to return the foundation to the position it was in before it made the taxable expenditure. It also permits the private foundation and its managers to avoid the imposition of the severe second-tier taxes of IRC 4945(b).

  2. To correct a taxable expenditure, a private foundation must recover funds and, when funds cannot be fully recovered, must take additional corrective action to prevent future violations. In cases where grantee or grantor has failed to satisfy the reporting requirements, correction will ordinarily involve obtaining or making the required reports.

7.27.19.9.3.1  (02-22-1999)
Definition and Method of Correction

  1. IRC 4945(b)(1), as stated above, provides that if a private foundation corrects a taxable expenditure during the taxable period, it and its managers will not be liable for the second-tier tax. However, the private foundation is not required to attempt to recover the taxable expenditure by legal action if in all probability a judgment would not be satisfied. See Reg. 53.4945–1(d)(1).

  2. Under IRC 4945(i) and Reg. 53.4945–1(d)(1), correcting a taxable expenditure is accomplished by recovering the amount of the expenditure to the extent recovery is possible. If all the funds constituting the taxable expenditure are recovered, the foundation will have corrected the transaction and need not take any further steps to avoid liability for the additional tax.

  3. If recovery of the full amount of the expenditure is not possible, the Service may require the private foundation, under the facts and circumstances, to take some or all of the following corrective actions:

    1. withholding any unpaid funds due to the grantee;

    2. making no further grants to the particular grantee;

    3. submitting, in addition to other reports that are required, periodic reports (e.g., quarterly) with respect to all its expenditures (such reports shall be equivalent in detail to the reports required by IRC 4945(h)(3) and Reg. 53.4945–5(d));

    4. improving methods of exercising expenditure responsibility;

    5. improving methods of selecting recipients of individual grants;

    6. Implementing other measures as the Service may prescribe in a particular case.

  4. If the expenditure is taxable only because of inadequate reporting (in violation of IRC 4945(h)(2) or IRC 4945(h)(3)), correction may be accomplished by obtaining the required report. In addition, if the expenditure is taxable only because of a failure to obtain a full and complete report from the grantee on how the funds were spent (i.e., IRC 4945(h)(2)) and an investigation indicates that no grant funds have been diverted to any use not in furtherance of a purpose specified in the grant, correction may be accomplished by exerting all reasonable efforts to obtain the report in question and reporting the failure to the Service, even though the report is not finally obtained. See Reg. 53.4945–1(d)(2).

  5. Where a grant is a taxable expenditure under IRC 4945(d)(3) only because of a failure to obtain advance approval of procedures under IRC 4945(g), correction may be accomplished by obtaining approval of the grant making procedures and establishing to the satisfaction of the Service that:

    1. No grant funds have been diverted for use not in furtherance of a purpose not specified in the grant;

    2. The grant making procedures instituted would have been approved if advance approval of such procedures had been properly requested; and

    3. Where advance approval of grant making procedures is subsequently required, such approval will be properly requested. See Reg. 53.4945–1(d)(3).

7.27.19.9.4  (02-22-1999)
Definition of Taxable Period

  1. The taxable period is, for purposes of correcting a taxable expenditure, begins with the date of the making of the taxable expenditure and ends on the earlier of:

    1. the date of a mailing of a notice of deficiency with respect to the first-tier tax; or

    2. the date on which the first-tier tax is assessed. See IRC 4945(i)(2) and Reg. 53.4945–1(e).

7.27.19.9.5  (02-08-1999)
Joint and Several Liability, and Limits on Liability of Foundation Managers

  1. If more than one foundation manager is liable for the first-tier tax imposed under IRC 4945(a)(2) or the second-tier tax under IRC 4944(b)(2), all foundation managers are jointly and severally liable for the tax imposed under each provision with respect to any one taxable expenditure. See IRC 4945(c)(1) and Reg. 53.4945–4(c)(1).

  2. The maximum aggregate) amount of tax all participating foundation managers are liable for with respect to any one taxable expenditure is $5,000 under the first-tier tax of IRC 4945(a)(2) and $10,000 under the second-tier tax of IRC 4945(b)(2). See IRC 4945(c)(2) and Reg. 53.4945–4(c)(2).

7.27.19.9.6  (02-22-1999)
Abatement of First-Tier and Second-Tier Taxes

  1. IRC 4962 grants the Service discretionary authority to abate certain Chapter 42 first-tier taxes including taxes under IRC 4945(a) for taxable events (i.e., making taxable expenditures) occurring after December 31, 1984. See IRC 4962(a) & (b).

    • In effect, this provision gives a private foundation and its managers a chance to avoid the imposition of the first-tier taxes under IRC 4945(a).

  2. A private foundation or its managers may abate the first-tier taxes only if they can establish to the satisfaction of the Service that the making of a taxable expenditure:

    1. was due to reasonable cause;

    2. was not due to willful neglect; and

    3. has been corrected within the correction period.

  3. Discussions of the definitions of "reasonable cause" and "willful neglect" (as well as abatement in general) are in IRM 7.27.16, Taxes on Failure to Distribute Income and in IRM 7.27.18, Taxes on Jeopardizing Investments.

  4. The correction period begins with the date on which the taxable expenditure was made and ends 90 days after the mailing of a notice of deficiency with respect to the second-tier tax. See IRC 4963(e)(1) and Reg. 53.4963–1(d).

    • The correction period can be extended by the Service if certain requirements are met. See Reg. 53.4963–1(e)(3). A discussion of the definition of correction period as well as the requirements for the extension of that period is also contained in IRM 7.27.16, Taxes on Failure to Distribute Income.

  5. IRC 4961(a) permits the abatement of certain Chapter 42 second-tier taxes including taxes under IRC 4945(b). Specifically, this provision provides that if a taxable expenditure is corrected during the "correction period," the second-tier tax imposed is not to be assessed, and if assessed, the assessment is to be abated. See IRC 4963(b).

7.27.19.10  (02-22-1999)
IRC 507 Termination and Other Sanctions

  1. If a private foundation willfully and repeatedly or willfully and flagrantly violates IRC 4945 (or any of the other provisions of Chapter 42), the Service may terminate its private foundation status pursuant to IRC 507(a)(2).

    1. Hence, such private foundation may be subject to the termination tax imposed by IRC 507(c). See IRM 7.26.7, on Termination of Private Foundation Status under IRC 507(a) and IRC 507(c) tax.

    2. In addition, a foundation manager may be liable for the tax under IRC 6684 in the amount equal to the tax under IRC 4945. See IRM 7.27.18, Taxes on Jeopardizing Investments, for a discussion of this topic.

7.27.19.11  (02-22-1999)
Digests of Published Rulings

  1. Educational (evaluating prospective legislation) — The exempt status of a nonprofit educational organization is not affected by its nonpartisan study, research, and assembly of materials in connection with prospective legislation relating to court reform and the dissemination of such materials to the public. Rev. Rul. 64–195, 1964–2 C.B. 138.

    Note:

    This revenue ruling deals with IRC 501(c)(3) and is used here as an example of permissible legislative activity.

  2. Legislative activity (testimony) — An exempt organization is not engaged in prohibited legislative activity if, at the request of a legislative committee, a representative testifies as an expert witness on pending legislation affecting the organization. Rev. Rul. 70–449, 1970–2 C.B. 111. Note that this revenue ruling deals with IRC 501(c)(3) and is used here as an example of permissible legislative activity.

  3. Fees to consultants — Payments to consultants by a private foundation for personal services performed in the development of model curricula and design of educational materials to aid the foundation in its program activity of assisting educators to employ improved educational methods are not grants within the meaning of IRC 4945(d)(3). Rev. Rul. 74–125, 1974–1 C.B. 327.

  4. Literary award — An award by a private foundation to the person who has written the best work of literary criticism during the preceding year, whether it is an article, essay, treatise, or book, is not a taxable expenditure within the meaning of IRC 4945(d)(3). Rev. Rul. 75–393, 1975–2 C.B. 451.

  5. Craft competition — An unconditional and unrestricted grant by a private foundation to the winner of a competition conducted among students attending schools specializing in teaching a special craft is not a taxable expenditure within the meaning of IRC 4945(d). Rev. Rul. 75–393, 1975–2 C.B. 451 modified. by Rev. Rul. 76–460, 1976–2 C.B. 371.

  6. Science award — An award by a private foundation to a high school senior whose exhibit receives top honors in a local science fair and is conditioned on the student’s agreeing to use the award for educational activities may be a taxable expenditure under IRC 4945(d)(3) and IRC 4945(g). Rev. Rul. 75–393, supra, distinguished by Rev. Rul. 76–461, 1976–2 C.B. 372.

  7. Employer-related grants to individuals — This revenue procedure provides guidelines for determining whether a grant made by a private foundation under an employer-related grant program is an IRC 117(a) scholarship or fellowship grant and a non-taxable expenditure meeting the requirements of IRC 4945(g). Rev. Proc. 76–47, 1976–2 C.B. 670.

  8. Employer-related grants to individuals — This Revenue Procedure sets forth rules under which private foundations may continue to rely on ruling letters approving their employer-related scholarship programs under IRC 4945(g)(1) that were issued prior to December 27, 1976, the date of publication of Rev. Proc. 76–47, 1976–2 C.B. 670, as clarified by Rev. Proc. 85–51, 1985–2 C.B.717. See also Rev. Proc. 77–32, 1977–2, C.B. 541.

  9. Scholarship grants — Scholarship grants made to individuals by a private foundation on the basis of academic standing, financial need, personal history, the cost of the programs of study to be pursued, and the likelihood that the recipients will be able to finance the balance of the cost of their education, are not taxable expenditures within the meaning of IRC 4945(d)(3). Rev. Rul. 76–340, 1976–2 C.B. 370.

  10. Educational grant tied to a commitment to teach — Grants made on an objective and nondiscriminatory basis by a private foundation to worthy college students who acknowledge that they plan to teach in a particular State after graduation satisfy the requirements of IRC 4945(g) and are not taxable expenditures under IRC 4945(d)(3). However, they are grants to achieve specific objectives as described in IRC 4945(g)(3) rather than grants constituting scholarships as described in IRC 4945(g)(1). Such grants are not excludible from the recipients’ gross income under IRC 117(a) as scholarships. Rev. Rul. 77–44, 1977–1 C.B. 355.

  11. Loan to disqualified person — A loan by a private foundation to a disqualified person that constitutes an act of self-dealing, but otherwise is a permissible expenditure, is not a taxable expenditure within the meaning of IRC 4945 (d)(5). Rev. Rul. 77–161, 1977–1 C.B. 358.

  12. Tools for vocational school students — Grants by a private foundation to vocational high schools to be used to purchase the basic tools of a trade for students selected by representatives of the foundation are grants to individuals for study and will be taxable expenditures unless the requirements of IRC 4945(g) are met. Rev. Rul. 77–212, 1977–1 C.B. 356.

  13. Grant to a private foundation, failure to list on Form 990–PF — A private foundation that failed to list on its original annual information return a grant to an organization not described in either IRC 509(a)(1), (2), or (3), but corrected the omission on an amended return filed after the due date, has failed to exercise the expenditure responsibility requirements of IRC 4945(h)(3) with respect to the grant, and the grant is a taxable expenditure. Rev. Rul. 77–213, 1977–1 C.B. 357.

  14. Grants in recognition of past achievement — Grants made by a private foundation primarily in recognition of past achievement, with the funds being unrestricted, or earmarked for subsequent travel or study and meeting the requirements of IRC 4945(g), are not taxable expenditures within the meaning of IRC 4945. Rev. Rul. 77–380, 1977–2 C.B. 419.

  15. Educational Loans — Long-term, low-interest educational loans made by a private foundation under a program that specifically limits the use of the funds to furtherance of the recipient’s education at an educational institution described in IRC 170(b)(1)(A)(ii) are individual grants within the meaning of IRC 4945(g)(3). Rev. Rul. 77–434, 1977–2 C.B. 420.

  16. Educational (political activity) — Certain "voter education" activities conducted in a nonpartisan manner by an organization recognized as exempt under IRC 501(c)(3) may or may not constitute prohibited political activity disqualifying the organization from exemption. Rev. Rul. 78–160 revoked. Rev. Rul. 78–248, 1978–1 C.B. 154. See also Rev. Rul. 80–282, 1980–2 C.B. 154.

  17. Scholarships to residents of a particular community — A private foundation, created and funded by a for-profit company, has a grant program to award scholarships to children of a particular community based on academic merit and need. The scholarships are awarded to children regardless whether their parents are employed by the Company. The scholarship program is not an "employer-related" grant program subject to the guidelines of Rev. Proc. 76–47. Rev. Rul. 79–131, 1979–1 C.B. 368.

  18. Scholarships for children of deceased or retired employees — For purposes of IRC 117(a) and 4945(g)(1), a private foundation’s scholarship program for children of deceased or retired employees of a particular company is an "employer-related grant program" to which the guidelines of Rev. Proc. 76–47 apply. Rev. Rul. 79–365, 1979–2 C.B. 389.

  19. Educational loans by an employer-related foundation — Guidelines for determining whether educational loans made by a private foundation under an employer related program are taxable expenditures. Rev. Proc. 80–39, 1980–2 C.B. 772.

  20. Grants to organizations (exempt cemetery company) — An unrestricted contribution made by a private foundation to an exempt cemetery company that is not described in IRC 170(c)(2)(B) is a taxable expenditure within the meaning of IRC 4945(d)(5). Rev. Rul. 80–97, 1980–1 C.B. 257.

  21. Grants made without approval of grantmaking procedures — The private foundation made a request for approval of its grantmaking procedures, did not receive a reply within 45 days, and considered its procedures approved under Regs. 53.4945–4(d)(3). Later, the foundation received notice that its procedures were disapproved. The remaining installments of its fixed-sum grants awarded during the "post 45-day period" are held to be approved and not taxable expenditures. Any renewals of grants awarded during this period must be made, however, subject to advance approval. Rev. Rul. 81–46, 1981–1 C.B. 514.

  22. Grant to a political instrumentality — A private foundation’s grant for exclusively charitable purposes to a wholly-owned instrumentality of the political subdivision of a state is not a taxable expenditure under IRC 4945(d)(4) and the foundation does not have to exercise expenditure responsibility. Rev. Rul. 81–125, 1981–1 C.B. 515.

  23. Educational grants to a public charity earmarked for award to children of employees of a particular company — The foundation makes grants to a public charity that evaluates student candidates and awards scholarships to the highly rated candidates. The foundation limits its grants for award to the children of employees of a particular company. The Service concluded that the grants are to individuals under IRC 4945(d)(3) and are employer-related to which Rev. Proc. 76–47 applies. Rev. Rul. 81–217, 1981–2 C.B. 217.

  24. Compensation of grantee’s research assistants — A private foundation makes payments on an objective and nondiscriminatory basis to qualified individuals to conduct scientific research projects. In many cases the grantees will use a portion of the grant funds to compensate individuals (either employees or independent contractors) who assist in the research projects. The grantees control — the selection of these individuals independently of the foundation. The Service concluded that compensation paid by the grantees to their research assistants are not grants by the foundation under IRC 4945(d)(3). Rev. Rul. 81–293, 1981–2 C.B. 218.

  25. Grants of one foundation to another — A private foundation must exercise expenditure responsibility over a grant to another private foundation even though both foundations have the same bank as their sole trustee. Rev. Rul. 82–136, 1982–2 C.B. 300.

  26. Indemnification of foundation manager — The foundation manager was defendant in a suit by state officials relating to mismanagement of the foundation’s assets. During the trial, the state and the manager entered into a settlement agreement providing for the manager to reimburse the foundation for the value of the assets lost. Under an existing indemnification agreement, the foundation proposes to indemnify the manager for the attorney fees, court costs, and amount paid in settlement of the suit. The Service concluded that payments of attorney fees and court costs are not taxable expenditures but payment to settle the suit against the manager is a taxable expenditure. Rev. Rul. 82–223, 1982–2 C.B. 301.

  27. Employer-related foundation’s grants to children of employees — Procedures for determining whether children of employees are eligible recipients for purposes of the 10% support tests of Rev. Proc. 76–47 and 80–39. Rev. Proc. 85–51, 1985–2 C.B. 717.

  28. Scholarships (family member preference) — Scholarship grants awarded under a procedure giving preference to family members of the substantial contributor are not awarded on an objective and nondiscriminatory basis as required by IRC 4945(g). Rev. Rul. 85–175, 1985–2 C.B. 276.

  29. Employer-related foundation’s grant to a child of an employee which does not meet the percentage test of Rev. Proc. 76–47 — The foundation proposes to make a small fixed-sum grant each year. The student will be selected from the children of employees of a particular company on an objective basis using criteria of financial need and academic ability. The grant will be awarded without regard to the percentage limitations of Rev. Proc. 76–47. The Service concludes that the grant would not be a taxable expenditure under IRC 4945(d)(3). The program satisfies the conditions of sections 4.01 through 4.07 of the revenue procedure but does not meet the test of 4.08. The facts and circumstances operate as a substitute for the percentage test. Rev. Rul. 86–90, 1986–2 C.B. 184.

  30. Judicial confirmation activities — Attempts by a private foundation to influence the Senate confirmation of a federal judicial nominee constitute attempting to influence legislation for purposes of IRC 4945(d)(1), but do not constitute influencing the outcome of a public election for purposes of IRC 4945(d)(2). Notice 88–76, 1988–2 C.B. 392.

  31. Procedures for making grants to foreign charitable organizations — Grants made by private foundations to foreign charitable organizations would not be taxable expenditures if they follow the procedures in Rev. Proc. 92–94, 1992–2 C.B. 507.

  32. Employer-related grants to individual — Rev. Proc. 94–78 sets forth the requirements under which private foundations may "round off" the number of allowable employer-related scholarship or loan grants (as long as the number of these grants be at least four without the rounding off). Rev. Proc. 94–78, 1994–2 C.B. 833, amplifying Rev. Proc. 76–47, 1976–2 C.B. 670 and Rev. Proc 80–39, 1980–2 C.B. 772.

  33. Exempt Organizations Determinations issues determination letters involving advance approval of grant making procedure under IRC 4945 and advance approval of voter registration activities under IRC 4945(f). Section 7.04, Rev. Proc. 2001-4, 2001-1 I.R.B. 121, 133 (updated annually).


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