IRS approves artist residency grant procedures

Plain-English summary

A private operating foundation sought advance approval for grants and stipends paid to participants in its arts, literature, and science residency program. Residents are selected nationally by an external panel, while the foundation's executive director determines which residents meet each funder's grant criteria. Awards are paid half upon arrival and half upon completion, and recipients must submit final reports describing their activities and use of funds. The foundation also represented that it would maintain case histories, investigate diverted funds, seek recovery, and withhold further payments when necessary. The IRS approved the procedures under IRC § 4945(g)(3), so expenditures made under the proposed procedures will not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation's procedures for awarding residency grants satisfy the advance-approval requirements for grants to individuals?
• Outcome: Approved, subject to operating the program as proposed
• Key authorities: IRC §§ 74(b), 117(a), 170, and 4945(g); 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: 20162912
Release Date: 7/15/2016                           Employer Identification Number:
Date: April 21, 2016

                                                  Contact person - ID number:

                                                  Contact telephone number:

Legend:                                          UIL: 4945.04-04

V = Organization Name
W = Organization Name
X = Organization Name
Y = Organization Name
Z = Organization Name

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
operating 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

Your purpose is to support innovative thinking through work in the arts, literature, natural
sciences and other fields of creative inquiry. To accomplish this you offer residencies
without a fee that provide the gift of time and space at your remote inspirational location
to eligible applicants. All residents are chosen through a national selection process by an
external selection panel made up of arts and science professionals.

The grant program in which you are seeking approval will fund various kinds of financial
support to offset other costs while the individuals are in your residency program. These
awards are to enable the residents of demonstrated capacity to produce creative
research/ work in the visual, literary, performing arts or sciences and to devote him/her to
such work exclusively without concern for making a living.

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You receive much of your funding from such entities as V, W, X, Y or Z to name a few.
When you apply for grants you are requesting funding for your operations as well as
other unique costs allowable and stipulated by each funder. These stipulations vary from
year to year, funder to funder. The number of grants awarded will be determined by the
amount of funds designated to be available by your funders and allocated contingent
upon the number of qualified and eligible recipients. This number will be varying. The
amounts awarded will be determined by a rubric of need, length of residency, activities
performed, travel and other costs related to funds set aside for determination per year.

Being accepted for a residency is what makes individuals initially eligible to receive
grants/stipends from the granting organizations such as V, W, X Y, or Z. Many grant
scenarios are possible but they all require the recipient to be first accepted into your
residency program.

You provided the following examples:

a. Y recently awarded you grant funding for this year and next. One-half of the
   funds are to be made available to:

   • Practicing visual artist currently producing works of art;

   • Be a full time resident of a certain state for at least 36 months prior to
     application; deadline and remain a resident through the duration of the
     grant period.

   • Be 30 year of age or older at the time of the application;

   • Provide evidence through appropriate documentation of a sustained level of
     commitment to his or her medium with seven or more years of active
     professional practice; and

   • Not enrolled in a degree-seeking program, either part-time or full-time at the
     time of the application or during the successive grant period.

b. Z is awarding you grant funding. Approximately 67% of that grant is to be used
   as grants/stipends limited to artists engaged in folk traditions such as basket
   weaving, silver-smithing, and saddle-making.

c. In the future, a grantor organization could award you a grant where part of the
   monies would be restricted grants/stipends for scientists who participate in your
   residency program.

d. Likewise, another grantor organization could make grants/stipends available to
   residents meeting certain other criteria.

Your executive director will determine which residents are eligible for the grant stipends
provided by your funders based on the grantor organizations’ requirements. Grant
stipends or awards will be made directly to the resident. One-half is paid upon arrival for
his/her residency, with the remainder paid at the completion of his/her residency. A final
report must be submitted to you within 60 days after the residency has been completed.

Letter 4779 (10-2012)
Catalog Number 58222Y

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The final report is a signed narrative describing activities conducted and uses of funds.
In the event, the recipient fails to complete the residency or the final report; he/she will
not receive the second half of the payment.

You represent that you will complete the following: (1) arrange to receive and review
grantee reports annually and upon completion of the purpose for which the grant was
awarded, (2) investigate diversion of funds from their intended purposes, and (3) take all
reasonable and appropriate steps to recover the diverted funds, ensure other grant funds
held by a grantee are used for their intended purposes, and (4) withhold further payments
to grantees until you obtain grantees’ assurances that future diversions will not occur and
that grantees will take extraordinary precautions to prevent future diversion from
occurring.

You will maintain case histories and document recipients of grants, including names,
addresses, amount of grants, purpose of grants, manner of selection and proof that they
were not related to officers, trustees or donors. In addition, when able, you will compile
photographic documentation, publications and other materials to be used to augment this
documentation of grantees and their products.

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.

Letter 4779 (10-2012)
Catalog Number 58222Y

4

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

• 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.

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,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Letter 4779 (10-2012)
Catalog Number 58222Y