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Rules Governing Practice before IRS

Violations of Expenditure Responsibility Requirements - Private Foundations

Any diversion of grant funds (including income from an endowment grant) for a use not specified in the grant may result in that part of the grant being treated as a taxable expenditure.  If the use of the funds is consistent with the purpose of the grant, the fact that a grantee does not use any funds as indicated in the original budget projection is not a diversion of funds.

If a grantor foundation determines that any part of the grant has been used for improper purposes and the grantee has not previously diverted grant funds, the foundation will not be treated as having made a taxable expenditure if it:

  1. Takes all reasonable and appropriate steps either to recover the grant funds or to ensure the restoration of the diverted funds and the dedication of the other grant funds held by the grantee to the purposes of the grant, and
  2. Withholds any further payments to the grantee, after being made aware that a diversion of funds may have taken place, until it has received the grantee's assurance that future diversions will not occur and required the grantee to take extraordinary precautions to prevent further diversions from occurring.

If a foundation is considered to have made a taxable expenditure, the amount of the taxable expenditure can be the amount of the diversion plus any further payments, or just the amount of further payments depending on the measure of compliance by the foundation.

Violations by the grantor:   In addition to the circumstances discussed above, a granting foundation will be treated as making a taxable expenditure if it:

  1. Fails to make a pre-grant inquiry,
  2. Fails to obtain required written commitments or
  3. Fails to make required reports to the IRS.


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