PLR 200850045: advance approval for a fellowship, and the side payment to employers it never examines

Plain-English summary

A private foundation asked for advance approval of the procedures it uses to pick and pay fellows in a public health leadership program, so that the payments would not be taxable expenditures. The Service approved them. About twenty fellows a year are selected for a ten-month commitment: two weekend retreats, monthly seminars, meetings with health leaders and policymakers, five hours of executive coaching, and an independent project on eliminating racial and ethnic health disparities. Each fellow receives an honorarium.

The approval runs under section 4945(g)(3), the branch covering a grant whose purpose is to achieve a specific objective, produce a report, or improve a capacity or skill of the grantee. That matters for what it leaves out. The letter quotes section 4945(g)(1), the scholarship branch, which turns on section 117(a), and then says plainly: "We have not considered whether grants made under your procedures are excludable from the gross income of recipients under section 117(a)". So the foundation is protected from the excise tax and the fellows are told nothing about their own returns, even though the honorarium is described as aiding their "personal or professional development" and the grant agreement allows it to fund tuition, conference fees, travel and research.

The larger gap is a second payment the letter mentions and never analyses. Where a fellow is employed by a nonprofit, the foundation will "award a gift in the amount of y to any such employer". Those payments go to organizations rather than individuals, so they fall outside section 4945(d)(3) and outside the advance approval entirely. The letter disposes of them in a single clause reciting the foundation's own representation that it "will comply with all applicable regulations concerning the exercise of expenditure responsibility". Nothing more is said. A payment whose occasion and size are set by an employee's participation in a third party's program is not an ordinary grant to the employer, and expenditure responsibility is the only control named.

One structural detail is worth recording alongside the conditions the Service attached. Approval is conditioned on the understanding that "no grants will be awarded to foundation managers, or members of the selection committee". The Selection Committee consists of four former fellows and one staff member of the foundation, and each review team is a former fellow, a board member and a staff member. The program deliberately recycles its alumni into the body that chooses the next class, so the condition operates as a bar on an alumnus serving on the committee and taking a grant in the same year. The foundation's own conflict rules are narrower and work by recusal or by reassigning a candidate to a different review team; the Service's condition is categorical.

The enforcement terms are unusually detailed for this kind of approval. Fellows must account for every dollar; inadequate accounts suspend further payments; money used for anything unrelated must be returned; a fellow who withdraws, is removed, or fails to complete the independent project must repay everything unless there is Good Cause, which is limited to death, disability or loss of employment. On a finding of diversion the foundation must investigate and pursue recovery, and in severe cases remove the fellow.

This determination cites section 6110(j)(3) rather than 6110(k)(3) as the provision barring use as precedent, the same divergence recorded at 0851038. It is signed by Robert Choi, Director, Exempt Organizations, Rulings and Agreements, and dated 9/19/08.

This is a scanned document and two corrections were made, both to enumerated lists where the scanner read the roman numerals as digits and the surrounding items make the sequence unambiguous: "(11)" restored to "(ii)" in the grant agreement terms, and "(111)" restored to "(iii)" in the recordkeeping list.

Left as published: the bullet glyphs, which render as a lowercase "e" for the selection criteria and "o" for their sub-points; the legend entry "y= §$", where the dollar sign is printed as a section symbol; the stray line reading "tO"; the mid-sentence capital in "a former Fellow, A Board member of X"; and one selection criterion that ends "commitment to the issue of eliminating racial and ethnic health.", the word "disparities" missing, though the full phrase appears correctly everywhere else in the letter.

Ruling snapshot

• Question: Do a private foundation's procedures for selecting fellows and paying them honoraria qualify for advance approval under section 4945(g)(3), so that the grants are not taxable expenditures?
• Outcome: Approved. The procedures comply with section 4945(g) and awards made under them will not be taxable expenditures within the meaning of section 4945(d)(3). The approval is one-time, covers only the program described, and is conditioned on no material change in the facts, on no grants to foundation managers or members of the selection committee, and on no purpose inconsistent with section 170(c)(2)(B). No opinion is expressed on section 117(a).
• Key authorities: Sections 4945(a) and 4945(b); section 4945(d)(3) and the three branches of section 4945(g), including 4945(g)(3); section 53.4945-4(c)(1) of the regulations on objective and nondiscriminatory selection, performance, and reporting; sections 117(a), 74(b) and 170(b)(1)(A)(ii) as quoted in the other two branches; section 170(c)(2)(B); section 4946; sections 501(c)(3) and 509(a).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 200850045
Release Date: 12/12/08 Employer Identification Number:

Date: 9/19/08
Contact Person - ID Number:

Contact Telephone Number:

LEGEND UIL 4945.04-04
X= Foundation

Y= Program

Z= State

x= $

y= §$

Dear

We have considered your request for advance approval of your grant-making program
under section 4945(g)(3) of the Internal Revenue Code, dated June 12, 2008.

Our records indicate that X was recognized as exempt from Federal income tax under
section 501(c)(3) of the Code and that it is classified as a private foundation as defined in
section 509(a).

Your letter indicates that X will operate a grant-making program called Y.

Y was established to foster, support and promote leadership and learning among the
generation of public health pioneers in the government, private and nonprofit sectors. X
expects to select approximately 20 Fellows each year to participate in a ten-month
program to increase their leadership knowledge and skills in order to better advocate and
lead effective health strategies that will improve the health and well-being of people in Z,
and help to eliminate racial and ethnic health disparities.

Fellows will make a ten-month commitment during which time they will be required to
attend two weekend retreats, monthly seminars and other educational activities. Fellows
will also complete an independent project related to the goal of eliminating racial and
ethnic health disparities. In addition, Fellows will meet with national and local health
leaders and policymakers, attend local and national conference workshops and symposia,
and receive five hours of executive coaching sessions to improve their leadership
knowledge and skills.

X will award Fellows an honorarium of x to aid in their personal or professional
development. Grant monies will be used by Fellows to facilitate the required activities
by funding (i) tuition and conference fees for educational programs related to racial and

tO

ethnic health disparities; (ii) travel to attend Program-related events; and (iii) research or
study required to complete their independent project.

In addition, in the case of Fellows who are employed by a non-profit organization, X will
award a gift in the amount of y to any such employer. Such payments will only be made
to nonprofit employers exempt under section 501(c)(3), and X will comply with all
applicable regulations concerning the exercise of expenditure responsibility.

X will solicit applications from interested individuals on an annual basis. Applicants
must (1) be a resident of Z or primary work must directly impact the people of Z, (2)
have experience or interest in working with health needs of minority populations, (3)
show strong evidence of leadership experience or potential, especially as related to
community projects or health policy and (4) intend to pursue a career in public health
practice, health care administration policy, academia or community advocacy.

The Fellowship program is advertised on X’s website, in emails that are sent to X’s
database of contacts, in a press release, in brochures that are circulated throughout X’s
network, and in advertisements in area newspapers.

Fellows will be selected through a competitive process that requires each applicant to
complete an on-line application consisting of personal information (contact information,
educational background, occupational background and a list of volunteer organizations
they are affiliated with), and the completion of three brief essay questions.

Review teams consisting of a former Fellow, A Board member of X and a staff member
of X will review a cluster of applications and select a certain number of applicants, based
on specific criteria, to move on to the interview phase. These criteria include:

e Candidates must be a resident of the State of Z, or primary work must directly
impact the people of Z.

e Candidates must express a commitment to eliminating racial and ethnic health
disparities.

e Candidates must accept and be available to fulfill the obligations of the
Fellowship, which consist of:

o Attending two weekend retreats
o Attending monthly Fellows’ Seminars

o Completing a project that demonstrates solutions to racial and ethnic
health disparities

e Candidates must have the support of their employer, as well as their consent to the
candidate’s full participation in the Program, including attendance at Program-
related events or participation in Program-related obligations during working
hours.

e Candidates provide answers to three essay questions designed to indicate
knowledge of the issue, commitment to developing leadership skills, and
commitment to the issue of eliminating racial and ethnic health.

After all the interviews within the cluster are completed, each team nominates a list of six
candidates to the Selection Committee for their review and approval.

The Selection Committee consists of four former Fellows and one staff member of X,
who acts as facilitator. The Selection Committee is responsible for reviewing the
applications of those recommended by the review teams and selects twenty candidates
and two alternates who will ultimately become the class for that given year.

Members of the review teams and the Selection Committee are required to identify any
relationship with a candidate or the candidate’s affiliates or intended program. If any
relationship exists which might cause a member to derive a private benefit, directly or
indirectly, from the selection of a candidate, the candidate will be reassigned to another
review team (in the case of a review team member) or the member shall be recused from
acting with respect to that candidate (in the case of the Selection Committee).

No candidate who is a disqualified person within the meaning of section 4946 of the
Code will be considered.

In the beginning of the year, Fellows will set leadership objectives for themselves based
on feedback from the first of two retreats they must attend and feedback from their first
executive coaching session. The manner in which the honorarium will be applied to
further advance the Fellows knowledge and skills and help them achieve their leadership
objectives will also be identified.

At the end of the year, each Fellow must complete a project and submit a paper that
explains the project and discusses what they have learned about their leadership and
ability to use their social capital to influence networks of people to take action to
eliminate racial and ethnic health disparities. It is in this paper that they will relate their
personal leadership objectives to their use of the honorarium and the degree they have
completed their objective.

Payments of grant money will be paid to Fellows in one or more installments over the
course of the Fellowship. Prior to the first grant payment date, Fellows will be required
to sign a grant agreement providing for the following terms and conditions:

(1) All grant money paid to the Fellows will be used solely in furtherance of the
Fellowship. To that end, Fellows must account for all grants money spent by
them, and provide such accounts to X upon request. To the extent Fellows
provide inadequate accounts with respect to grant money spent or fail to
provide such accounts, X will investigate such accounts (or lack thereof) and
the corresponding use of such grant money and will suspend any further
payments of grant moneys until adequate accounts have been submitted. Any
grant money used for purposes unrelated to the Fellowship must be returned to
X.

(ii) All grant money paid to Fellows must be returned to X if, without Good
Cause, the Fellow (1) withdraws his or her participation in the Program; (2) is
removed from the Program for any reason by X; or (3) fails to complete his or
her independent project.

Good Cause will be limited to such extraordinary events as death, disability or
loss of employment.

(iii) | Upon withdrawal of participation in the Program for any reason, payments of
grant money to a Fellow will cease.

The final reports will be reviewed by staff members of X. If grant funds are determined
to be misused, all further payments of grant money will be suspended until after X has
received the relevant Fellow’s assurance that future diversions will not occur and
required the Fellow to take extraordinary precaution to prevent future diversions from
occurring. In addition, X will undertake a thorough investigation, including, but not
limited to, examinations of the Fellow’s accounts of grant money expenditures. If after
its investigation, X determines that a diversion of grant funds has occurred, then
depending upon the extent of the diversion and the use to which such diverted funds have
been put to, X will take all reasonable and appropriate steps to recover the grant funds or
to insure the restoration of diverted funds and the dedication of other grant funds held by
the applicant to the purposes for which the grant was made. In severe cases, X will
remove the Fellow from the Program, and require the Fellow to return all previously
received grant money.

X agrees to maintain records that include the following:
(i) Information used to evaluate the qualification of potential grantees;

(ii) Identification of the grantees (including any relationship of any grantee to the
private foundation);

(iii) | The amount and purpose of each grant; and

(iv) All grantee reports and other follow-up data obtained in administering the
private foundation’s grant program.

Sections 4945(a) and (b) of the Code impose certain excise taxes on “taxable
expenditures” made by a private foundation.

Section 4945(d)(3) of the Code provides that the term “taxable expenditure” means any
amount paid or incurred by a private foundation as a grant to an individual for travel,
study, or other similar purposes by such individual, unless such grant satisfies the
requirements of subsection (g).

Section 4945(g) of the Code provides that section 4945(d)(3) shall not apply to individual
grants awarded on an objective and nondiscriminatory basis pursuant to a procedure
approved in advance if it is demonstrated that:

(1) The grant constitutes a scholarship or fellowship grant which is subject to the
provisions of section 117(a) and is to be used for study at an educational
organization described in section 170(b)(1)(A)(ii);

(2) The grant constitutes a prize or award which is subject to the provisions of
section 74(b), if the recipient of such prize or award is selected from the
general public, or

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

Section 53.4945-4(c)(1) of the Regulations provides that to secure approval, a private
foundation must demonstrate that:

(i) Its grant procedure includes an objective and nondiscriminatory selection
process;

(ii) Such procedure is reasonably calculated to result in performance by grantees
of the activities that the grants are intended to finance; and

(iii) | The foundation plans to obtain reports to determine whether the grantees
performed activities that the grants are intended to finance.

Based on the information submitted and assuming your award programs will be
conducted as proposed with a view to provide objectivity and nondiscrimination in
making the awards, we have determined that your procedures for granting the awards
comply with the requirements contained in section 4945(g) of the Code and that awards
granted in accordance with such procedures will not constitute “taxable expenditures”
within the meaning of section 4945(d)(3).

This determination is conditioned on the understanding that there will be no material
change in the facts upon which it is based. It is further conditioned on the premise that
no grants will be awarded to foundation managers, or members of the selection
committee, or for a purpose that is inconsistent with the purpose described in section
170(c)(2)(B) of the Code.

The approval of your award program procedures herein constitutes a one-time approval
of your system standards and procedures designed to result in awards which meet the
requirements of section 4945(g)(3) of the Code. This determination only covers the grant
programs described above. Thus, approval shall apply to subsequent award programs
only as long as the standards and procedures under which they are conducted do not
differ materially from those described in your request.

We have not considered whether grants made under your procedures are excludable from
the gross income of recipients under section 117(a) of the Code.

Any funds you distribute to individuals must be made on a true charitable basis in
furtherance of the purposes for which you are organized. Therefore, you should maintain
adequate records and case histories so that any or all award distributions can be
substantiated upon request by the Internal Revenue Service.

This determination is directed only to the organization that requested it. Section
6110(j)(3) of the Code provides that it may not be used or cited as a precedent.

You must report any future changes in your grant making procedures. Please keep a copy
of this letter in your permanent records.

We have sent a copy of this letter to your representative as indicated in your power of
attorney.

If you have any questions, please contact the person whose name and telephone number
are shown above.

Sincerely yours,

Robert Choi
Director, Exempt Organizations
Rulings and Agreements