Social entrepreneur fellowship procedures receive approval

Plain-English summary

A private foundation proposed a two-year fellowship program for social entrepreneurs working on health, poverty, and conservation problems in areas of extreme poverty. Fellows would receive annual stipends, participate in a design course and mentoring, and submit progress and final reports. The foundation would use stated selection criteria, recruit through professional networks and a public website, monitor use of funds, recover misused amounts, and keep case histories. The IRS approved the procedures under IRC § 4945(g)(3). Grants made under those procedures would not be taxable expenditures, subject to the conditions in the determination.

Ruling snapshot

• Question: Do the foundation's procedures for social entrepreneur fellowships satisfy the advance-approval requirements for grants to individuals?
• Outcome: Approved
• Key authorities: IRC §§ 74(b), 117(a), 170(b)(1)(A)(ii), 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

Release Number: 201505044
Release Date: 1/30/2015 Employer Identification Number:

Date: November 4, 2014
Contact person - ID number:

Contact telephone number:

LEGEND UIL

X = program name 4945.04-04
Y = organizations

f = dollar amount

g = number
h = number
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

You will operate an educational grant program called X to provide fellowships to social
entrepreneurs who have promising solutions to major problems in health, poverty and
conservation in areas of extreme poverty. Each fellowship is granted to achieve a specific
goal. X was previously operated by Y; you decided it would be more appropriate if you
operated the program yourself.

X is a two-year program and includes a stipend of f dollars per year. The heart of the
program consists of an annual week-long design course and semiannual hands-on
mentoring and redesign sessions with a select faculty of highly successful entrepreneurs
who have extensive experience with philanthropic entrepreneurship. The program
generally ranges from g to h fellows. Each year the number of fellows selected is

2

dependent on the number of spaces available in the program and the number of
candidates to choose from.

Fellows are selected based on the following criteria, directly related to the purpose of the
fellowship.

1. A big and compelling social problem
2. An idea that feels scalable
3. An entrepreneurial personality and track record
4. An obsession with going to scale
5. An organization up and running, even if very small
6. Senior decision-making authority (usually an Executive Director or Chief Executive
   Officer)
7. A desire to tackle the process of scalable design
8. A full understanding of your program design process and tools and
9. Openness to new ideas and the willingness to change course.

Each fellow is selected based on a demonstration that they meet the above criteria and
are exceptionally suited to effectuate the charitable purpose of your program. The fellows
are selected by your senior staff with input from the Program Manager of X.

Your staff, the X faculty of entrepreneurial advisors and X staff have extensive networks
of contacts through which they actively recruit fellows. The X program is also explained in
detail on its website. The website invites questions and applications from the general
public.

Fellows must fully participate in the annual week-long design course and semiannual
mentoring process and must demonstrate consistent work towards formulating and
implementing a solution to their particular problem. In addition, fellows must produce
reports during the annual week-long design course and as part of the semiannual
mentoring process. The reports demonstrate each fellow’s progress in the program. You
will review the reports to ensure that each fellowship is being used for its intended
charitable purposes.

You will require a final report from each fellow at the end of the two-year fellowship
describing his/her accomplishments and accounting for the use of the funds. You will
regularly review these reports, and if you determine that a fellow has improperly used
funds, you will stop any future payments and attempt to recover the misused funds.

You will maintain case histories showing the recipient of your fellowships including
names, address, purposes of awards, amount of each, manner of selection and
relationship (if any) to officers, trustees, or donors of funds to you. Awards will not be
given to disqualified persons.

Letter 4779 (10-2012)
Catalog Number 58222Y

3

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:

Internal Revenue Service

Exempt Organizations Determinations
P.O. Box 2508

Cincinnati, OH 45201

Letter 4779 (10-2012)
Catalog Number 58222Y

4

• 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

Enclosures
Notice 437
Redacted letter

Letter 4779 (10-2012)
Catalog Number 58222Y