PLR 1046018: IRS approves a private foundation's professional development grant program

Plain-English summary

The IRS reviewed a private foundation's proposed grant program to support professional development for employees of its nonprofit grantee organizations. The grants could fund conferences, workshops, and professional development courses, subject to application, selection, reporting, and recovery procedures. The IRS concluded that the proposed objective and nondiscriminatory procedures satisfied section 4945(g)(3), so qualifying awards would not be taxable expenditures under section 4945(d)(3). The approval was limited to the described program and conditioned on no material change in the facts or procedures.

Ruling snapshot

• Question: Do the foundation's proposed professional development awards qualify for advance approval under section 4945(g)(3)?
• Outcome: Approved
• Key authorities: IRC §§ 4945(d)(3) and 4945(g)(3); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

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

Number: 201046018
Release Date: 11/19/2010

Employer Identification Number:

Date: August 26, 2010
Contact Person - ID Number:

Contact Telephone Number:

LEGEND UIL: 4945.04-04

Y= Name of Program
V= Trustees

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 December 22, 2009.

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

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

Y was established to provide financial support to promote activities that will provide
personal and professional growth opportunities for employees of the Foundation’s current
grantee organizations in order to improve or enhance the capacity, skill, and talent of
individuals who work in the nonprofit sector.

You have indicated that the grants may be used for personal and professional growth
opportunities such as to attend national conferences or completing workshops or
professional development courses. You have indicated that you plan on giving up to 10
grants per year. All costs including accommodations and travel will be covered by the
Professional Development grant, up to a maximum of $

Since you give grants to organizations around the country, the program is not limited to a
particular geographic location.

Eligible applicants for the grants are employees of the 40- 60 non profit organizations
that you current provide grants. You have indicated that there are approximately 550
employees eligible of which you believe that 50-100 will apply.

You have indicated that you will notify all of your current grantees about the program
through e-mail announcements and grantee meetings. The applicants will need to
complete an application form which must be co-signed by the applicant and the executive
director of the organization that employs the applicant or if the applicant is the executive
director, then the co-signer should be the Chairperson of the nonprofit organization’s
Board of Directors.

Applications are reviewed by your Capacity Building Program Officer and another
program officer depending on the nature of the applicant’s organization. Example being
if the applicants employing organization is a wilderness protection organization then the
Wilderness Program Officer will also review the application to help the Capacity
Building Program Officer evaluate the application materials and check the supporting
references. After the initial review, the Capacity Building Program Officer will make
recommendations to your trustees who will make the final selections of the grant
recipients. V is the current trustees of the foundation who both serve on the boards of
various nonprofit organizations.

You have a policy that your past or present trustees, officers, and or employees and any
family members of such individuals will not be eligible to receive grants, nor will any
person who is a “disqualified person” with respect to you within the meaning of Section
4946(a).

Selection criteria for the Professional Development Grant award recipients are:
Demonstration that the proposed activity is relevant and beneficial to the nonprofit
Section 501(c)(3) public charity that is the individual applicant’s employer; Potential for
the proposed activity to provide personal and professional growth relevant to the
individual applicant’s current (or future) position; and demonstration of the individuals
strong work ethic, personal initiative and commitment to service in the nonprofit sector.
The Foundation will not discriminate on the basis of race, gender, sexual orientation,
ethnicity, or religion, or take into account a candidate’s employment relationship with
any person. The Foundation may take into account the accomplishments of applicants
who have overcome significant obstacles, including particular barriers presented by their
economic circumstances, physical handicaps or illness, or membership in a minority

group.

You indicated that you will send out an award letter to notify the grant recipient and
his/her employer of the grant. The letter will specify that all amounts must be used for
the purpose described in the grant application. The letter will describe the reporting
requirements and the due dates of those requirements. The letter will require the grant
recipient and her/his employer to sign and return a copy of the award letter to indicate
their acceptance of the grants and its terms. The funds will not be disbursed until the
signed letter is received.

You indicated that you will send the grant checks to the Section 501(c)(3) public charity
that is the grant recipient’s employer with instructions to disburse the grant funds to cover
the costs of the professional development activity described in the grant application.

They will also be instructed to return by check any remaining funds after all of the costs
related to the approved professional development activity have been paid.

You indicated that you will require each grant recipient’s employer to submit a 1-2 page(s)
written report within a reasonable timeframe after the completion of the funded activity.
The report must describe the use of the grant funds and the accomplishments and benefits
of the funded activity from both the individual’s personal perspective and the employer’s
organizational perspective. The reports must be co-signed by the applicant and the
executive director of the organization that employs the applicant or if the applicant is the
executive director, then the co-signer should be the Chairperson of the nonprofit
organization’s Board of Directors. Due to the nature of the activities, the Foundation
does not believe that any of the activities will be longer than a year to complete, however
you have indicated that if the activity will be longer than a year that you will require the
recipient to complete a report at least annually and again when the program is complete.

You indicated that if you have not received the reports in a reasonable amount of time then
you will initiate an investigation and withhold any further payments to the extent possible
until it is determined that no part of the grant has been used for improper purposes and
until the delinquent report has been submitted. If improper use of the funds has been
determined, you indicated that you will seek to recover the funds and receive assurances
from the nonprofit organization and/or the individual that future improper diversions will
not occur and require them to take precautions to prevent further diversions. If you
determine that they have diverted the funds a second time, along with seeking recovery of
the funds, you may discontinue all future payments until the diverted funds are recovered
or restored and continue future payments if it is determined that it will further your
charitable purpose.

You indicated that if you determine that the award recipient does not complete the funded
activity, you will seek to recover any grant funds that have not been disbursed by the
employer to pay the costs or that can be refunded to the employer from the organization
that conducted the activity and have the residual funds returned.

You agree 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)(i);

(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(k)(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