Educational grant procedures receive advance approval

Plain-English summary

A private foundation proposed joining an educational grant program that funded organizations employing educators nominated for their strong records and innovative ideas. Applications would be reviewed using educational quality, organizational readiness, implementation history, and educator involvement, while applicants connected to disqualified persons would be excluded. Grants would be paid in installments, with six-month program and financial reports, ongoing monitoring, recordkeeping, and recovery or withholding of funds when necessary. The IRS found that these procedures met IRC § 4945(g)(3)'s advance-approval requirements. Expenditures made under the approved procedures would not be taxable, provided the program operated as described and future programs did not differ significantly.

Ruling snapshot

• Question: Did the private foundation's educational grant procedures satisfy the advance-approval rules for avoiding taxable expenditures?
• Outcome: Approved
• Key authorities: IRC § 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

Release Number: 201451052
Release Date: 12/19/2014 Employer Identification Number:
Date: September 22, 2014

Contact person - ID number:

Contact telephone number:

LEGEND: UIL:

B = foundation 4945.04-04
C = LLC

D = grant program

E = religion

f = dollar amount
g = dollar amount
h = dollar amount
j = dollar amount
k = dollar amount
m = dollar amount

Dear

You asked for advance approval of your educational grant procedures under Internal
Revenue Code section 4945(g)(3). This approval is required because you are a private
foundation that is exempt from federal income tax.

Our determination

We approved your procedures for awarding educational grants. Based on the information
you submitted, and assuming you will conduct your program as proposed, we determined
that your procedures for awarding educational grants meet the requirements of Code
section 4945(g)(3). As a result, expenditures you make under these procedures won't be
taxable.

Description of your request

B, a foundation and the sole member of C, operates an educational grant program called
D. The purpose of D is to deepen and enrich the E educational learning opportunities of
students and, where relevant or desired, their families, by offering grants to organizations
for use in such programs. While B will primarily fund D, B may request that other donors
enter into their original grant agreement with the recipient in providing additional funding.
You plan on operating in connection with B to become an additional donor party to the
grant agreement. In doing so, you will provide grants to the original recipient and funds

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would be administered and monitored under the procedures established by B described
below.

The duration and amounts of the grants awarded to educational organizations will vary,
but most are expected to be in the form of three year grants in amounts ranging between
f and g dollars per annum. You will fund each grantee’s program in the first year.
Thereafter, grantee organizations are expected to obtain increasing amounts of donor
commitments to cover the costs of their programs.

You expect to mail informational materials to individual educators who are working at
organizations that provide E educational programming to students in grades kindergarten
through twelfth grade and college. The educators who have received (or will receive) the
solicitation materials and application package have been (or will be) pre-selected by
nominators engaged by you to identify and recruit potential applicant organizations with
outstanding educators at their organizations.

Since you do not have educational staff with E educational experience, you developed
relationships with individual consultants who have experience with formal and informal
programming to help identify an appropriate applicant pool and to ensure high quality
among the applicant pool.

You have engaged individuals to serve as nominators in connection with D. You
requested that the nominators identify a group of outstanding innovative educators
working with educational organizations who you could invite to apply for funding.
Nominators were asked to identify individuals with a reputation for implementing high
quality programming and a proven track record for achieving educational results.
Additionally, you requested that nominators identify educators who the nominators
believe can propose new programs that could be implemented by the educational
organizations where such educators are employed that would deepen and enrich the
knowledge and identity of the students of such organizations and educators and if
relevant, the families of these students. While the objective is to have innovative
educators design D programs, you will also consider the nature of the organization where
the educator is employed, as the organization will be responsible for supporting,
sustaining and implementing the educational programming if the organization is awarded
a D grant.

The class of eligible grantees is limited to educational organizations at which educators
identified by the nominators are employed. Although the invitations are intended to be
non-transferable and personal to the identified educators, you are committed to building
educational programming at the grantee organization under the supervision of either the
nominated educator or another qualified educator at the organization that is selected by
the grantee organization. In making their initial nominations, the nominators will take into
account the experience of the organization in implementing high quality educational
programming.

Letter 4779 (10-2012)
Catalog Number 58222Y

You will review the submitted applications, based upon a number of criteria, including,
experience and track record of the applicant organization in executing effective E
educational programming, the clarity of the plan and budget, readiness of the
organization to implement the proposed project and goals of the proposal and the
probability of the organization achieving the stated goals of the proposal.

You expect to commit funds to D in its first year sufficient to enable between ten to twenty
grantee organizations to begin developing programs with the nominated educators.
Thereafter, the extent to which you will commit to funding programs and new grantees
will be determined after an assessment regarding the success of the first grantees’
programs and available resources.

Each grantee may request a different amount for each of the three years as it builds its
program. In the first year, grantees may request between f and g dollars. In the second
year, grantees may request between f and h dollars. In the third year, grantees may
request between f and j dollars. In years two and three, the grantee organization is
expected to also raise program funds from other sources.

During the third year of the grant, you will evaluate the impact of the program and
effectiveness of grantee organizations for achieving proposal objectives. Based upon
implementation feedback such as increases in the program participants or quantity of
time participants spend engaged in programming supported by D or increased depth or
measure of learning as determined by valid educational measures, you will invite a
number of grantees to apply for an additional two years of grant funding. If awarded an
extension grant, each grantee organization would be eligible to receive a maximum of k
dollars in year four and m dollars in year five. As with the standard three year grants,
such extension grant will be made with the expectation that the grantees secure
increasing amounts of donor commitments to offset program costs.

You will fund each grant in installments with an initial payment up front to fund the first
eight months of programming in year one. Thereafter, each grantee organization would
submit a report to you every six months. Upon receipt of a report which evidences the
satisfactory continued implementation of the program supervised by an adequately
qualified educator (whether the initial nominated educator or a replacement selected by
the educational organization), you will fund the subsequent payments in years one, two
and three (and, if extended, years four and five). If the nominated educator leaves the
educational organization after you enter into the grant agreement, the educational
organization would be responsible for selecting an adequately qualified educator to
continue implementing the program.

Grantees will submit written reports to you every six months. Reports will include a
narrative description of the implementation of the educational programming and will be
accompanied by a financial report on the use of granted funds compared against the
budget. A program coordinator or other C representative will regularly communicate with
each recipient organization to receive feedback on the funded program and how the grant
monies are being spent in connection to such programming.

Letter 4779 (10-2012)
Catalog Number 58222Y

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Each grant recipient must keep and maintain such financial records and in such a
manner so as to adequately reflect and account for the use of the organization grant
funds, and to furnish originals, or authentic copies to the program coordinator upon
request. C, in its sole discretion, may take any and all such reasonable and appropriate
steps (including, possibly, legal action) to compel compliance of use of funds for their
intended purpose, including requiring the return of all, or any portion, of funds remitted
and the withholding of funds not previously remitted.

The awarding of D is a multi-faceted process which begins with the initial identification of
educational organizations at which nominated educators are then employed. Nominated
educators are then sent informational materials and grant applications which they are
encouraged to complete with the appropriate stakeholders at their respective educational
organizations. Applications must be submitted by educational organizations. Completed
applications submitted by those educational organizations are then received by you and
evaluated by your selection committee.

Each completed application will be reviewed by one or more members of your staff and a
nominator (other than the nominator who originally nominated the educator who was the
architect for the related proposal). Each member will rate the application in connection
with following parameters:

• The internal logic, educational strength and process of implementing the educational
proposal described in the application.

• The evidence and probability that the proposed educational programming will
significantly deepen and enrich the educational growth of the program participants.

• The track record of the organization in implementing educational programming and in
successfully implementing new educational programming.

• The readiness of the organization and commitment of the organization to expand and
offer the new programming.

• The level of involvement and supervision which the selected educator will assume in
guiding the project.

The selection committee will also be responsible for identifying any relationships between
potential grant applicants and disqualified persons and ensure that organizations with any
such relationship(s) are not awarded grants. Your selection committee consists of one or
more members of your staff; and a nominator (other than the nominator who originally
nominated the educator who was the architect for the related proposal).

If any member of the senior staff or management of a potential grant recipient is either

related to (whether by blood or through marriage) or has any direct or indirect affiliation with
the D program coordinator or any director, officer or employee of you or C, they will be
ineligible to participate in the program.

Letter 4779 (10-2012)
Catalog Number 58222Y

No director, officer or employee of you or C, or any other person who is involved in the
process of selecting applicants for the program will be in a position to derive a private
benefit, directly or indirectly, if certain potential grantees are selected over others.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(Code section 4945). A taxable expenditure is any amount a private foundation pays as a
grant to an individual for travel, study, or other similar purposes. However, a grant that
meets all of the following requirements of Code section 4945(g) is not a taxable
expenditure.

• The foundation awards the grant on an objective and nondiscriminatory basis.
• The IRS approves in advance the procedure for awarding the grant.
• The grant is:

• A scholarship or fellowship subject to section 117(a) and is to be used for
  study at an educational organization described in section 170(b)(1)(A)(ii); or

• A prize or award subject to the provisions of section 74(b), if the recipient of
  the prize or award is selected from the general public; or

• To achieve a specific objective; produce a report or similar product; or
  improve or enhance a literary, artistic, musical, scientific, teaching, or other
  similar skill or talent of the recipient.

To receive approval of its educational grant procedures, Treasury Regulations section
53.4945-4(c) (1) requires that a private foundation show:

• The grant procedure includes an objective and nondiscriminatory selection
process.

• The grant procedure results in the recipients performing the activities the grants
were intended to finance.

• The foundation plans to obtain reports to determine whether the recipients have
performed the activities that the grants were intended to finance.

Other conditions that apply to this determination

• This determination covers only the grant program described above. This approval
will apply to succeeding grant programs only if their standards and procedures
don't differ significantly from those described in your original request.

• This determination applies only to you. It may not be cited as precedent.

• You cannot rely on the conclusions in this letter if the facts you provided have
changed substantially. You must report any significant changes in your program to
the Cincinnati Office of Exempt Organizations at:

Letter 4779 (10-2012)
Catalog Number 58222Y

Internal Revenue Service

Exempt Organizations Determinations
P.O. Box 2508

Cincinnati, OH 45201

• You cannot make grants to your creators, officers, directors, trustees, foundation
managers, or members of selection committees or their relatives.

• All funds distributed to individuals must be made on a charitable basis and must
further the purposes of your organization. You cannot award grants for a purpose
that is inconsistent with Code section 170(c) (2) (B).

• You should keep adequate records and case histories so that you can substantiate
your grant distributions with the IRS if necessary.

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

Please keep a copy of this letter in your records.
If you have any questions, please contact the person listed at the top of this letter.

Sincerely,

Director, Exempt Organizations

Letter 4779 (10-2012)
Catalog Number 58222Y