(a) Germane Lobbying

A foundation can spend its money to make an appearance before, or communicate to, any legislative body with respect to a possible decision of such body that might affect the existence of the PF, its powers and duties, its tax-exempt status, or the deduction of contributions to it. This type of activity is referred to as self-defense lobbying.

The existence of the organization is not threatened for this purpose merely by a possible loss of economic support that might affect the scope of a foundation's programs.²⁰ Lobbying in favor of an appropriations bill funding a program under which the PF has received support in the past is not self-defense. Similarly, a PF that provides care for the elderly is lobbying when its executive director appears before the state legislature to favor or oppose a bill authorizing the state to provide nursing care for the aged. Likewise, a PF receiving governmental grants to support its research programs is lobbying when it testifies about the advisability of continuing the program (unless it was asked to testify). It is the economic condition and the resulting scope of the PF's operation, not its underlying existence, that is at issue in these examples.

Examples of legislation that could affect the foundation's existence or its powers, and is thereby a permissible subject of lobbying, might include the following:

• A state's reformation of its charitable corporation statutes to include provisions not now in a foundation's charter, such as a rule limiting the life of a foundation to some term certain.
• Provision that would restrict the power of a foundation to engage in transactions with certain related parties.
• Change in the excess business holdings provisions that would cause the foundation to have a self-dealing transaction.
• Proposal to require inclusion of outside directors on a foundation's governing body.
• Limitation on administrative expenses included as qualifying distributions that effectively increase the mandatory payout and result in a diminution in use of foundation principal.²¹

(b) Nonpartisan Study of Social Issues

Sponsoring discussions or conferences, conducting research, and publishing educational materials about matters of broad social and economic subjects, such as human rights or war and peace, are appropriate and permissible activities for a private foundation. These topics are often the subject matter of legislation, involve public controversy, and raise the possibility of the foundation being treated as conducting prohibited legislative activity. However, a foundation is safe in sponsoring such discussions and studying such issues as long as (1) the activity constitutes engaging in nonpartisan analysis, study, or research, and (2) the results of the work are made available to the general public, a segment of the public, or to governmental bodies, officials, or employees.²²

The phrase nonpartisan analysis, study, or research means an independent and objective exposition or study of a particular matter. To be nonpartisan, or impartial, the activity must be considered educational.²³ The report can advance a particular position or viewpoint if there is a sufficiently full and fair exposition of the pertinent facts to enable an individual or the public to form an independent opinion or conclusion. A communiqué could say that oil tankers should have double hulls to lessen the possibility of oil spills so long as the information forming the basis for the viewpoint is unbiased. Mere opinion, unsupported by pertinent facts, is not nonpartisan. The regulations contain 12 examples that can be studied.²⁴

The making available test is satisfied when the results of the nonpartisan research or study are distributed in articles, reports, conferences, meetings, discussions, press releases, and other public forums. The communications cannot be directed solely toward those who are interested in one side of the issue. Additionally, subsequent use of the research in grassroots lobbying by a grantee or other organization permitted to lobby may result in a taxable expenditure for the foundation that finances the study. The somewhat complicated rules distinguishing research materials from advocacy communications look to the primary purpose for which the study was conducted to determine whether the research was intended to influence legislation.²⁵

A broadcast or publication series must meet the same standards as printed matter. One of the presentations can contain biased information if another part of the series (broadcast within six months of the initial viewing) contains contrary information or the other side of the argument. If the PF selects the time for presentation of information to coincide with a specific legislative proposal, the expenses of preparing and distributing that part of the study may be treated as lobbying and result in a taxable expenditure.²⁶

The foundation's communications, either directly with members of the public or with the legislators themselves, may not:

• Mention or refer to the merits of or take a position on specific legislation.
• Recommend that the reader or listener take any steps to contact legislators, employees of legislators, or government officials or employees involved in legislation, or contain a call to action.²⁷

(c) Grants to Public Charities that Lobby

A PF can make a grant to a public charity that conducts legislative lobbying, regardless of whether the grant recipient has made the §501(h) election. Importantly, the foundation's money cannot be earmarked for lobbying or electioneering. There must be no agreement, oral or written, that the granting PF can direct the manner in which the funds are expended.²⁸ Also, the PF's grant cannot be more than the amount needed to fund the recipient organization's budget for nonlobbying projects. If, after a grant satisfying these rules is paid, the grant recipient loses its exempt status due to excessive lobbying, the money paid is not a taxable expenditure only if:²⁹

• The grant was not earmarked for lobbying.
• The recipient had a valid determination of its public status and notice of the revocation was not published when the grant was made.
• The foundation does not control the public charity.

A foundation may want to protect itself from any question that its grant pays for lobbying by specifically requiring that its public charity grantees agree not to do so. For grantees significantly involved in public affairs, the prudent foundation can retain, and is entitled to rely on, financial information supplied by a prospective grantee that reflects the portion of the public charity's budget spent on lobbying.³⁰ A foundation can also document its efforts to ensure that its funds are not spent on lobbying with the grant approval checklist (Exhibit 17.2), with a request for signature on the grant payment transmittal letter (Exhibit 17.4). Such precautions are not, however, required.

Due to the reluctance on the part of some private foundations to support public charities that conduct lobbying activity, the organization Charity Lobbying in the Public Interest³¹ engaged the law firm of Caplan & Drysdale to prepare a letter addressing a series of questions about such grants. Some of the questions are addressed in this subsection with the following exceptions:

• Q: What constitutes “earmarking” of a grant for lobbying?
• A: “Earmarking” a grant for lobbying is making a grant with an oral or written agreement that the grant will be used for lobbying.
• Q: Absent a specific agreement to the contrary, will the recitation in a grant agreement that “there is no agreement, oral or written, that directs that the grant funds be used for lobbying activities” be sufficient to establish to the satisfaction of the IRS that there has been no earmarking for lobbying?
• A: Yes, absent evidence of an agreement to the contrary.
• Q: Is a foundation required to include a specific provision in its grant agreements that no part of the grant funds may be used for lobbying?
• A: A specific provision is required only if the grantee organization is not a public charity, or if the private foundation earmarks the grant for use by an organization that is not a public charity.
• Q: Under what circumstances can a foundation make a grant to a public charity for a specific project that includes lobbying?
• A: Such a grant can be made if (1) no part of the grant is earmarked for lobbying; (2) the foundation obtains a proposed budget signed by an officer of the public charity showing that the amount of the grant, together with other grants by the same foundation for the same project and year, does not exceed the amount budgeted, for the year of the grant, by the public charity for activities of the project that are not lobbying; and (3) the foundation has no reason to doubt the accuracy of the budget.
• Q: Similarly, does it matter that the public charity's proposal indicates that it will be seeking funds for the specific project from other private foundations without referring to other additional sources of funds?
• A: No, the specific project grant rules in §53.4945-2(a)(6)(ii) of the regulations do not require the foundation to concern itself about the other sources of funding for the project in such situations.
• Q: What if, in the conduct of the project, the public charity makes lobbying expenses in excess of its estimate in the grant proposal?
• A: If there was no earmarking and no reason to doubt the original accuracy of the budgets, no taxable expenditure occurs. However, knowledge of the excess may provide a reason to doubt the accuracy of subsequent budgets submitted by the public charity.³²

The absolute prohibition against the foundation itself conducting lobbying or electioneering does not extend to conduct of its officials acting on their own behalf. Even though such persons are closely identified with the foundation, their personal actions are not constrained by these rules. The guidelines for determining when a minister active in public affairs represents himself or herself rather than the church should be studied by foundation officials.³³

(d) Summary of Permissible Activity

To summarize this important constraint, a private foundation and its managers on its behalf can participate in efforts that involve matters of public policy. Such activities do not constitute legislative intervention in the following situations:

• Self-defense (or germane) lobbying.
• Technical assistance or expert testimony given upon request.
• Grants (not earmarked for lobbying) to public charities that lobby.
• Nonpartisan analysis, study, or research.
• Programs involving topics that are the subject of legislation.
• Direct communication with government officials, including legislators, and also with the general public, without reference to and not in support of specific legislation.
• Efforts to influence regulations or other administrative rules clarifying and interpreting existing laws.
• Lobbying efforts of managers acting on their own behalf.

(a) Meaning of “Travel, Study, or Other Purposes”

A taxable expenditure results if individual grants are not paid pursuant to an approved plan. Individual grants also cannot be earmarked to be used for political, legislative, or other noncharitable activities.³⁷ Grants to individuals in need of shelter and food, no-strings-attached awards for achievement, and certain other types of grants to individuals may not require a preapproved plan.

A grant to an individual for travel or study, or grants for similar purposes, must also be one of the following three types:

1. Grant constituting a scholarship or fellowship grant that would be subject to the provision of IRC §117(a) as it was in effect prior to the Tax Reform Act of 1986 to be used at an educational institution qualifying as a school.³⁸
2. Prize or award³⁹ paid to a recipient selected from the public.
3. Grant to achieve a specific objective; produce a report or other similar product; or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee.⁴⁰

Only grants paid to individuals for these three purposes are subject to the prior plan approval rules. By far the most numerous private rulings issued for exempt organizations address individual grants under this provision. The concepts are illustrated in three scenarios.⁴¹ In the first, the grant is not subject to IRS approval, but in the second and third, approval is required.

Scenario 1. A PF organized to promote the art of journalism makes awards to persons whose work represents the best examples of investigative reporting on matters concerning the government. Potential recipients are nominated; they do not apply for the award.⁴² The awards are granted in recognition of past achievement and are not intended to finance any specific activities of the recipients nor to impose any conditions on the manner in which the award is expended by the recipient. Therefore, because the payments are not to finance study, travel, or a similar purpose, the awards project was not subject to prior approval.

Scenario 2. Assume instead that the annual award recipients are required to take a three-month summer tour to study government at educational institutions. These awards are subject to prior approval because the payment is required to be used for study and travel.

Scenario 3. The facts are the same as in Scenario 1, except that the award must be used to pursue study at an educational institution and qualifies as a scholarship. Again, prior approval is required. A similar conclusion was reached in a ruling concerning grants to science fair winners that required them to use the prizes for their education. The program was a scholarship plan requiring approval.⁴³

Other Purposes. The meaning of “grants for other similar purposes” can be elusive. Importantly, a person receiving the grant must be a member of a charitable class.⁴⁴ The regulations say that student loans and program-related investments do constitute such grants.⁴⁵ When the payment is given with the expectation or requirement that the recipient perform specific activities not directly of benefit to the foundation, the grant program requires preapproval. Research grants and payments to allow recipients to compose music or to choreograph a ballet are examples of awards for other purposes when the recipient must perform to earn the award.⁴⁶

A payment to an indigent individual for the purchase of food or clothing is not paid for an “other similar purpose.”⁴⁷ Grants and interest-free loans made to persons who incur extraordinary medical expenses or funeral or burial costs or who suffer financial hardship due to medical emergencies, natural disasters, or violent crimes are not grants for other purposes and do not require preapproval. Such grants are awards to relieve suffering, not to finance study, travel, or similar purpose. A PF's proposal to make a grant to an organization to fund sabbaticals, combined with increased compensation for the second-in-command, for the chief executives of public charities was approved.⁴⁸

No-Strings-Attached Awards for Achievement. Preapproval is not required for a program to award grants to individuals in recognition of past achievement with no conditions on how the awards are expended (no strings attached). A grant paid without intention to finance or specify the future activities of the individual, as illustrated in Scenario 1, is not a other purpose grant. Awards paid to winners of a craft school competition on an unconditional and unrestricted basis were also approved.⁴⁹ Grants in recognition of literary achievement not given to finance future activity, not imposing any future condition on the recipient, and not paid for travel, study, or other purpose do not require preapproval.⁵⁰

The criteria for choosing recipients of such awards should be designed to achieve and relate to a charitable purpose. Although the objective and nondiscriminatory standard does not technically apply, it's suitable that the award criteria evidence an intention to benefit a reasonably open class of potential awardees. Publicity making the public aware of the awards evidences impartiality. The criteria should evidence no favoritism toward persons related to the foundation creators, managers, or friends. The Nobel Peace Prize or the MacArthur Lifetime Achievement Awards are good examples of prizes that serve to acknowledge persons who work to advance science, education, culture, health, and other charitable pursuits that benefit all. The awards honor past achievements and do not specify how the monetary award is expended. The PF making such awards should keep records to document its criteria for choices, the charitable purposes it intends to achieve, and evidence of lack of any relationship between the recipient and the foundation's disqualified persons.⁵¹

A Model Plan. There are plenty of private letter rulings seeking approval for scholarship plans that contain selection criteria based on scholastic performance and leadership potential. Fewer in number are rulings that seek approval for fellowships and other similar purposes. The following criteria were approved by the IRS for a foundation granting prizes and awards to achieve a specific result, produce a report, or improve or enhance literary, artistic, musical, scientific, or other skill or capacity:⁵²

• Potential benefit to the proposed activities in the community and specific population to be served.
• Capacity of the organization or individual to achieve the result.
• Adequacy of proposed financial and time budgets for achieving the desired result.
• Evidence of cooperation and coordination with other organizations and individuals working in the same field.
• Likelihood of ongoing support from other sources for the program.
• Other factors indicating that the program will accomplish the foundation's charitable purposes.

Importantly, the ruling also confirmed the distinctions between grants for future performance and those for past accomplishments. Prizes and awards the foundation proposed to present for past achievement were not subject to preapproval. A complex and detailed plan to award research grants for medical research, enabling basic medical research in the areas of heart disease, cancer, and AIDS, received IRS approval. The ruling contained explicit requirements that might be considered by PFs applying for IRS approval of their individual award procedures.⁵³

(b) Compensatory Payments

Payments for personal services, such as salaries, consultant fees, and reimbursement of travel and other expenses incurred on behalf of the foundation, for work performed on the foundation's own project(s), are not grants requiring a preapproved plan. A foundation can freely hire persons to assist it in planning, evaluating, and developing projects and program activity by consulting, advising, and participating in conferences organized by the foundation.⁵⁴ Persons hired to develop model curricula and educational materials, for example, are not grant recipients.⁵⁵

In 1986, Congress reduced the tax-free portion of scholarships, fellowships, and prizes. All payments other than those paid for tuition, books, and fees are taxable to grant recipients. Certain scholarships and, particularly, teaching fellowships are taxable for another reason: the fact that the recipient is expected to render services in return for receiving the grant. Where there is an exchange of services for pay, the grant is made primarily for the benefit of the granting foundation and the approval rules do not apply. Scholarships paid by a foundation formed to aid worthy college students planning to teach in state public schools were found to have strings attached—services to be rendered for the state. As a condition of the grant, recipients had to indicate that they were willing to teach for two years in state public schools after receiving their degrees. The obligation carried no financial guarantee and was merely a moral obligation of the student, but the IRS nonetheless found that such scholarships were not described in IRC §177(a) and, therefore, prior approval was not required.⁵⁶ Essentially, the grants were paid in exchange for future services.

(c) Food, Shelter, and Aid for the Poor and Distressed

Programs to make grants-in-aid to individuals who lack the resources to satisfy their basic human needs do not require advance IRS approval. Before 2000, few foundations made such hardship grants. The regulations contain only one example of persons deserving such support: buying furniture for a poor family. No income or asset standards for measuring poor to determine financial need are provided. A foundation must decide at what level of financial resource a family ceases to be poor. There has been no guidance regarding information that should be obtained and maintained to document the worthiness of recipients.

In response to the outpouring of financial support in aid to the victims of the September 11 World Trade Center disaster, the IRS issued Publication 3833, entitled Disaster Relief: Providing Assistance Through Charitable Organizations,⁵⁷ applicable to both private and public charities. As described later, this useful guidance makes a distinction between victims of a disaster in immediate need and those needing longer-term aid. The publication states that “providing aid to relieve human suffering that may be caused by a natural or civil disaster to relieve an emergency hardship is charity in its most basic form.” The use of existing organizations, such as churches, was encouraged by saying they “are frequently able to administer relief programs more efficiently and can offer assistance over a long period of time.”⁵⁸ Seemingly in response to skeptics questioning what would happen to the generous support for September 11 relief efforts, the publication reminds readers that the assets of a charitable organization must only be spent on and are permanently dedicated to accomplishing its mission.

A needy and distressed test must be in place for disaster relief and emergency hardship organizations. A set of objective criteria by which distributions to financially or otherwise distressed individuals is described. Adequate records to support the basis upon which assistance is provided must also be maintained. The publication distinguishes between short-term and long-term assistance and notes that the type of information needed to support assistance may vary depending on the circumstances:⁵⁹

Individuals do not have to be totally destitute to be needy; they may merely lack the resources to obtain basic necessities. Under established rules, charitable funds cannot be distributed to individuals merely because they are victims of a disaster. Therefore, an organization's decision about how its funds will be distributed must be based on an objective evaluation of the victim's needs at the time the grant is made. [The publication added new standards in a section entitled “Employer-Sponsored Assistance Programs” for defining the charitable class of eligible recipients for aid.]⁶⁰

The publication makes it clear that a private foundation can help victims in a variety of ways, including aid to individuals and businesses. Aid may be provided in the form of funds, services, or goods to ensure that persons have basic necessities such as food, clothing, and shelter. The type of aid that is appropriate depends on the individual's needs and resources. A program to distribute short-term emergency assistance requires far less documentation, in the way of victims establishing that they need relief assistance, than the distribution of long-term aid. In the face of an immediate disaster—providing a drug rescue and telephone crisis center or recovery to a person lost at sea or trapped by a snow storm—would not require a showing of financial need, as the individual requiring these services is distressed irrespective of the individual's financial condition. However, “they may not require long-term assistance if they have adequate financial resources.”⁶¹ The IRS bottom line for this test is that persons who are needy and/or distressed are appropriate recipients of charity.⁶²

Adequate standards for providing long-term aid to the needy still do not exist. At what income level a person or family is deserving and the type of hardships a foundation should address are not specified. A foundation can make such grants-in-aid but has a burden of proving that the recipients are chosen to accomplish a charitable purpose in a nondiscriminatory fashion. The criteria for awarding such grants for food, shelter, and medical care should be designed to award funds only to those who are indeed qualified for charitable assistance or persons also referred to as members of a charitable class. To document the charitable nature of the program, a written policy, including an application form, should be used to describe the basis for the decision to grant aid. Facts such as income levels, cause of the hardship, recommendations of a government agency, or referrals from a church are among the factors that might be used to make the choice.

The need to establish criteria to evidence the charitable nature of such programs was also indicated in the IRS's refusal to approve a program to grant funds to ministers to pay outstanding educational loan balances related to studying for their ministry.⁶³ It is important to note that the proposed grant was not one requiring prior IRS approval because the ministers were not required to perform any specific acts. The factors the IRS found lacking included:

• The foundation did not request that the ministers establish that the funds would be used for charitable purposes. (With the right words in their grant documents, it could have been asserted that the program served religious purposes.)
• Grantee ministers were not required to provide any follow-up reports or accounting of the fashion in which they used the grant. (In connection with awards made in honor of achievement, no follow-up reporting is required.)
• Grantees were not required to evidence financial need to qualify for the grants. (Since the grants were not awarded on the basis of achievement, this factor should have been present.)

IRS has refused to grant tax-exempt status to an organization that provides financial aid to disadvantaged patients who have a medical need for marijuana, because the use of marijuana is illegal.⁶⁴

(d) Designing an Individual Grant Program

Once a foundation chooses to make grants subject to the approval process, it must adopt a suitable plan. The primary criterion for approval of a plan for making individual grants is that the grants must be awarded on an objective and nondiscriminatory basis. A “racially nondiscriminatory policy as to students” is defined as meaning that the school admits students of any race to all the rights, privileges, programs, and activities generally accorded or made available to students at that school and the school does not discriminate on the basis of race in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs.⁶⁵ The plan must contain the following provisions:⁶⁶

• An objective and nondiscriminatory method of choice, consistent with the PF's exempt status and the purpose of the grant, is used. IRS policy requires, despite the lack of such terms in §170(b)(1)(A)(ii) or applicable regulations, that a school operate pursuant to a racially nondiscriminatory policy as to students.⁶⁷
• The group from which grantees are selected is sufficiently broad so as to constitute a charitable class.⁶⁸ The size of the group may be small if the purpose of the grant so warrants, such as research fellows in a specialized field.
• Criteria used in selecting the recipients include (but are not limited to) academic performance, results of tests designed to measure ability and aptitude motivation, recommendations from instructors, financial need, and conclusions a selection committee might draw from a personal interview as to an individual's potential ability and personal character.
• Selection committee members do not derive a private benefit, directly or indirectly, if one person or another is chosen. A selection committee made up of persons unrelated to foundation officials to evidence objectivity is not required.⁶⁹
• Grants are awarded for study at an academic institution, or as fellowships, prizes, or awards for study or research involving a literary, artistic, musical, scientific, or teaching purpose.
• Procedures to obtain reports are provided for scholarships, fellowships, and research or study grants.

Class of Potential Grantees. The second criterion in the preceding list requires the group from which the grantees are chosen to be sufficiently broad. A group including all students in a city or all valedictorians in a city or state clearly qualifies. The regulations sanction a plan to grant 20 annual scholarships to members of a certain ethnic minority living within a state.⁷⁰ However, a group of girls and boys with at least one-quarter Finnish blood living in two particular towns was found to be a discriminatory group and not sufficiently broad.⁷¹ Likewise, a plan that gave priority to family members and relatives of a disqualified person was found to be discriminatory.⁷² Although self-dealing does not technically occur if a grant is made to a niece or nephew of the creator,⁷³ awards to such relatives could be considered to give private inurement to the creator. A program to award scholarships at two named colleges to members of a particular 603-person family group (surname specified) was not a broad enough group.⁷⁴ The IRS found that the fact that the school made no effort to recruit minority children to balance its ethnicity evidenced discrimination.

Scholarships and Fellowships. A report of the grantee's courses and grades earned in each academic period must be collected at least once annually and verified by the educational institution. If scholarship funds are paid directly to the school and the school agrees to monitor the student's ongoing qualification, such reports are not necessary.⁷⁵ For grantees whose work does not involve classes but only the preparation of research papers or projects, such as a doctoral thesis, the foundation should receive an annual report approved by the faculty members supervising the grantee, or another school official. Upon completion of a grantee's study, a final report must also be obtained.

Investigation of Diversions. Procedures must be established to investigate when no reports are filed or when reports indicate that funds are being diverted. The foundation will not be treated as making a taxable expenditure if the recipient has not previously misused funds and if the PF takes the steps outlined later in this chapter during its investigation. Additional grant funds must be held until delinquent reports are received, and reasonable steps to recover the funds should be taken.⁷⁶

Research or Study Grants. At least annually, a report of progress and use of funds is due. A final report describing the grantee's accomplishments and funds expended with respect to the grant must also be made.

• During the investigation, the PF must withhold additional payments until it receives the grantee's assurances that future diversions will not occur and must require the grantee to take extraordinary precautions to prevent future diversions from occurring.
• The PF must take reasonable steps to recover the funds.
• If a grantee was reprieved after an initial investigation and the PF reinstituted the grant only to have the funds diverted for a second time, a taxable expenditure will not occur if the same steps are repeated and the diverted funds are recovered.⁷⁷

Record-Keeping. A foundation making individual grants must maintain and keep available for IRS examination documentation that the recipients are chosen in a nondiscriminatory manner and that proper follow-up is accomplished. The regulations do not specify a required time period.

The following records must be kept:

• Information used to evaluate the qualification of potential grantees.
• Reports of any grantee/director relationships.
• Specification of amount and purpose of each grant.
• Grade reports or other progress reports approved by a faculty member, which must be received annually.

Income Tax Reporting. A foundation's grant to an individual does not necessarily represent taxable income to the grant recipient. In a circumstance in which the recipient award represents payment for services rendered or a business recruitment or employee retention program, the scholarships payments may be taxable either on Form W-2 or Form 1099.⁷⁸

(e) Company Scholarship Plans

The regulations and countless rulings have approved scholarship plans established by a company's foundation for children of the company's employees.⁷⁹ One issue with such plans is whether they discriminate in favor of the corporate executives or shareholders and thus represent a means of paying additional compensation. Specific guidelines exist and should be carefully studied prior to application for approval of such a plan.⁸⁰ Similar rules apply to a company foundation's educational loan program.⁸¹ The nine primary criteria are as follows:

1. The scholarship plan must not be used by the employer, the PF, or the organizer thereof to recruit employees or to induce continued employment.
2. The selection committee must be wholly made up of totally independent persons, not including former employees, preferably including persons knowledgeable about education.
3. Identifiable minimum requirements for grant eligibility must be established and eligibility should not depend on employment-related performance, although up to three years of service for the parent can be required.
4. Employees, or children of employees, must meet the minimum standards for admission to an educational institution⁸² for which the grants are available and are reasonably expected to attend such an institution.⁸³
5. Selection criteria must be based on substantial objective standards such as prior academic performance, tests, recommendations, financial need, and personal interviews.
6. A grant may not be terminated because the recipient or parent terminates employment. If the grant award is subject to annual review to continue support for a subsequent year, the recipient cannot be ineligible for renewal because the individual or his or her parent is no longer employed.
7. The courses of study for which grants are available must not be limited to those of benefit to the employer.
8. The terms of the grant and course of study must allow recipients to obtain an education in their individual capacities solely for their personal benefit and must not include any commitments, understandings, or obligations of future employment.
9. In its original ruling on company plans, the IRS said that no more than 10 percent of the eligible persons and no more than 25 percent of the eligible persons who submitted applications and were considered by the selection committee can be awarded grants.

Essentially, the facts and circumstances should not indicate that the awards represent an additional source of compensation to a significant number of employees and their children who routinely receive the scholarships. Additionally, the plan must be made known, or publicized, to all eligible employees. The IRS did permit a company foundation plan to be amended to include educational grants to employees and children of employees who are victims of a qualified disaster.⁸⁴

Due to the self-dealing rules, no grants can be paid to children of disqualified persons. The plan must avoid a disproportionate amount of grants to executives' children. Application for approval is the same as for other scholarship plans, although satisfaction of the nine tests just listed must be outlined.

(f) Seeking Approval

An application for approval of a scholarship plan is submitted on Form 8940. The approval procedure does not contemplate specific approval of particular grant programs but rather approval of a system of standards, procedures, and follow-up designed to result in grants which meet the requirements. Thus, such approval applies to a subsequent grant program if the procedure under which it is conducted do not differ materially from those described in the request to the Commissioner.⁸⁵ The PF submits its proposed procedures for awarding grants as illustrated in Exhibit 17.1, including the methods of meeting the selection process requirements.⁸⁶

If within 45 days after submission of the plan, no notification is received that the procedures are unacceptable, the PF can consider the plan approved; silence signifies approval. Written IRS approval is customarily sent to successful applicants, but usually well beyond 45 days. In one instance, scholarship payments made prior to the date on which the PF sought IRS approval were taxable expenditures, not only because of the lack of approval but also because the company had insufficient data to prove that the plan was objective and nondiscriminatory.⁸⁷ In contrast, payments made after the 45 days have passed and prior to receipt of written approval are not deemed a taxable expenditures. Even if the IRS denies approval or suggests modifications to the plan submitted, the foundation is protected before notice of disapproval by the assumed approval date.⁸⁸ Newly created foundations can seek approval for a plan in connection with filing Form 1023 by submitting proper and fully disclosed responses on Schedule H. The instructions do not, however, contain the 45-day rule.

“Approval of an organization's exemption application does not in itself constitute approval of the organization's grant-making procedures unless the exemption letter so provides. If the organization has fully disclosed its scholarship grant-making procedures in its application, however, it may nevertheless NOT be subject to the section 4945 excise taxes on taxable expenditures by operation of the 45-day rule. If you believe that the omission of such language from your organization's determination letter was an error on our part, please see Internal Revenue Manual 21.3.8.12.19 for information on how to request a corrected/superseding letter.”⁸⁹

As a foundation administers a scholarship plan over time, it may wish to change or expand the program. The issue becomes whether the revision is a “material” change in the originally approved system of standards, procedures, and follow-up procedures that requires submission of a request for approval from the IRS. For example, is a change allowing a student five, instead of four, years to complete an undergraduate degree a material change? What if the foundation wishes to award funds for graduate study to its successful undergraduates? What if it wishes to expand the permitted course of study from art history to liberal arts? It is likely that such expansion of benefits to recipients chosen under the approved plan would not be considered material. However, there is no IRS guidance on the issue. The intent of this provision in the tax code focuses on objectivity and lack of discrimination in choosing recipients and an intention to serve an educational or charitable purpose with individual grants. In view of that criterion, the three examples posited here would likely not be material.

(g) Individual Grant Intermediaries

A foundation wishing to avoid the administrative burden and cost of applying for approval and disbursing scholarships directly can alternatively fund a grant program at an independent public charity. The foundation may be involved in the process. As long as the foundation has no control over the choice of recipients, it is not considered to have made the grants directly to the individuals.⁹⁰ There must be no agreement, oral or written, that the PF can dictate the selection of particular individuals. No earmarking is permitted, only suggestions.

The parameters of the grant, such as the study discipline—medicine or law, for example—or qualifications, such as grades or civic achievement, can be stipulated by the foundation, though the class of grantees should be relatively broad. Grants to fund scholarships for children of employees may be considered grants by the company foundation itself, not by the college administering the plan.⁹¹ Actually suggesting an individual grantee is permitted, as long as there is an objective manifestation of the public charity's control over the selection process. Maintaining the right to veto a potential recipient is de facto control.⁹² Likewise, a research grant disbursed by a college was found to be a direct grant when the funding was contingent on supervision by the professor designated by the PF with reserved rights to patents, inventions, and publications arising from the research, and the PF retained authority to approve the professor's project and any of his scientific work.⁹³ The regulations contain useful examples for further study.⁹⁴

(a) Proof of Public Status

A grant-making private foundation must adopt procedures to document the tax character of grant recipients. Due to significant improvements in irs.gov/charities-non-profits, the information may be available on the IRS website if the grantee's name and federal identification number are known. Continuing to request the letter can be useful to allow a correct search on the new Publication 78, called Tax Exempt Organization Search (Pub 78).

As discussed in §18.1(e) and §18.2(c), any IRC §501(c)(3) organization that failed to file a Form 990, 990-EZ, 990-N, or 990-PF automatically has its exempt status revoked. Many organizations listed in Pub 78 now say their exempt status was revoked. Members of an affiliated group of organizations centralized under the common supervision and control of a parent organization do not individually obtain a determination letter and are not listed in Pub 78. Therefore, to verify their public charity status, the foundation should request documentation that the entity is indeed a member of a group (most issue a certificate), look up the parent organization on Guidestar or Pub 78, and observe whether the front page of the grantee's Form 990 indicates that it is a member of such group.

When an organization is not found in Tax Exempt Organization Search, a toll-free call to 1-877-829-5500 can reach a human being in the Cincinnati determination group who may furnish current information about an organization's status. Many potential grantees are listed in electronic sources as public charities, including IRS Tax Exempt Organization Search, IRS Business Master File, Foundation Source Grant Safe, and Guidestar. Some may have incorrectly prepared Schedule A reflecting adequate public support ratios. A prudent foundation might obtain verification, but unless the entity is controlled doing so is not required.

Indian tribes may also qualify as governmental organizations for expenditure responsibility purposes. The IRS publishes a list of qualifying Indian charities and outlines the procedures whereby tribal organizations can receive a determination-type letter to provide directly to donors. The letter states that the tribe in question is a federally recognized tribal government or subdivision of a tribe.¹⁰¹

Distributions to Supporting Organizations. A nonoperating PF may not count as a qualifying distribution¹⁰² an amount paid to a Type III supporting organization (SO) that is not functionally integrated with the organization it supports.¹⁰³ Similarly, a grant to a Type I or II SO controlled by a disqualified person is not counted as a qualifying distribution. Though those grants are not included for purposes of measuring satisfaction of the payout requirement, they can be paid if an expenditure responsibility agreement is entered into to document the charitable nature of the grant.¹⁰⁴ The making of such a grant without such an agreement is treated as a taxable expenditure.

The dilemma is that many SOs have no proof of their type. That information is now sometimes disclosed on the determination letter and on Tax Exempt Organization Search. The IRS Business Master File does distinguish the three categories of public charity by designating an SO with Code 17, but it does not list the SO type. Most troubling, the master list is not kept up to date for changes in classification reported on the annual Form 990, nor has accuracy of public-support test data submitted on Schedule A been verified. To compound the challenge, the list enters some members of a group exemption as SOs despite their public support levels. Consequently, when faced with the need to identify Type III SOs to which grants would not count, for which expenditure responsibility (ER) had to be exercised, a PF may have no IRS validation of status. IRS guidance on facing this issue may be helpful.¹⁰⁵

(b) No IRS Exempt Status or Letter

Churches and their integrated auxiliaries and governmental units do not commonly receive recognition of exemption as public charities, although some seek recognition to aid in fund-raising. When a foundation wishes to support such entities, other sources to document the grantee's qualification may be available. Many church groups have certification issued by a national or area association of the member parishes and congregations. For example, Catholic churches, schools, and affiliated auxiliaries are listed in a handsome maroon leather-bound national directory of affiliates. For a church with no such proof, the foundation can gather information directly from the church to determine if the church satisfies the 14-point test for qualification as a church.¹⁰⁶

It is troubling to some foundations that wish to support a project of a governmental entity that such an entity has no determination letter evidencing its classification as a public charity. The tax code may ease the concern with two citations:

1. IRC §170(b)(1)(A)(v) says, “any charitable contribution to a governmental unit referred to in subsection (c)(1),” or a state, a possession of the United States, or any political subdivision of either.
2. IRC §509(a) negatively defines a public charity by saying that a private foundation is an organization other than one described in §170(b)(1)(A)(vii) or (viii).

A U.S. governmental unit is a public charity.¹⁰⁷ Further, a foreign government, or any agency or instrumentality thereof, is treated as a §509(a)(1) organization.¹⁰⁸ The factors that determine whether a program qualifies as an instrumentality of the government can be found in Chapter 10.¹⁰⁹ Verification that a program is a division of the government may require additional steps. A certificate from the local municipality, school district, county, or other authority might be obtained. A governmental unit is a body that possesses at least three capabilities: the power to assess and collect taxes, police powers to enforce the law, and sovereign powers of eminent domain.¹¹⁰

(c) The Reliance Issue

A longstanding rule says that a PF may rely on the grantee's favorable Determination Letter until the IRS publishes notice of a change in status, unless the PF is responsible for or aware of the act or failure to act that resulted in revocation of the grantee's Determination Letter.¹¹¹ When the grantee organization is not controlled by the foundation—that is, the PF cannot cause it to act or prevent its acts—the PF is not required to investigate the effect of its grant on the recipient's public charity status.¹¹² When the foundation has a relationship with the grantee organization, and certainly if the PF controls the grantee, the foundation has a responsibility to determine whether its grant will cause the recipient organization to lose its public status.

A change of status might include becoming a private rather than a public charity or actually losing tax exemption through a revocation. The monthly updating of Pub 78 means revocation notice is available promptly. Seldom should the grantor PF need to search the Internal Revenue Bulletins to verify revocation. A notice of change in public charity status, however, may not be available.

The situation in which a private foundation grant causes loss of public status is referred to as tipping. When a public entity undergoes a “substantial and material change” in its public charity status, the PF can make the grant if:

1. It can satisfy itself that it was not responsible for the change in status by reviewing the grantee's financial information. The grantor is not responsible if its gift in a year is less than 25 percent of the recipient's total gifts for the immediately preceding four years.
2. The PF can ascertain that the grant is an unusual one that will not cause the grantee to lose public status.
3. The PF can exercise expenditure responsibility.¹¹³

Under two circumstances, the grantee must be required to redistribute the grant to allow the PF to report the grant as a qualifying distribution, including a grant to a controlled organization and a private foundation. IRS guidance in 2018 modified, superseded, and consolidated previously issued guidance for grantors and contributors to tax-exempt organizations on deductibility and reliance issues.¹¹⁴ Significantly, information published on IRS databases and published by other sources using the EO BMF Extract may be used until an announcement of the change is published in the Internal Revenue Bulletin.

When determination letters were first issued to Form 1023-EZ filers beginning in June 2014, many thought the determination might not necessarily be reliable. The application did not originally require organizational documents and financial information. After reports of lack of qualification for many nonprofits approved with the original form, the form and its instructions were revised, and can now be relied upon.

(d) Earmarked Grants

Public charities are free to make grants to individuals, to support a newly created but yet-unrecognized organization, to finance lobbying efforts, and to conduct a host of other projects that might not be permissible for a private foundation. Consequently, there is a temptation for a PF to funnel or pass money through a public charity for such a project that the PF itself cannot undertake or for which it does not wish to exercise expenditure responsibility. An earmarked grant to a public charity to do something the PF itself is not permitted to do can result in a taxable expenditure.

A foundation grant to an intermediary organization—also called a fiscal agent—may be treated as a grant by the PF to the ultimate grantee if the foundation has control over the re-grant.¹¹⁵ The rules are similar to the rules applicable to designating scholarship recipients.¹¹⁶ A look-through rule applies when the PF earmarks its grant in an oral or written manner. If the re-grant is to another public charity, there is no problem (unless the grant is earmarked for lobbying or for a individual). If the re-grant is to be made to another PF or for some other purpose described in IRC §4945, a taxable expenditure may occur. When a foundation grants funds to an organization or fiscal agent in this fashion, the grant should be carefully documented.¹¹⁷

(a) Recognition of U.S. Public Status

There are three alternative ways in which the foreign organization's eligibility to receive a private foundation grant directly can be evidenced:

1. The foreign organization has IRS recognition of its public charity qualification.
2. The foundation obtains evidence of the foreign organization's equivalency to a qualified public charity.¹²⁰
3. The foundation exercises expenditure responsibility.¹²¹

Whichever of the preceding alternatives applies, a private foundation must obtain, and maintain, information that describes and evidences its grant funding is spent to accomplish a charitable purpose.

Two factors—proof of public charity status and the charitable nature of use of funding—must prove that the disbursement satisfies both the minimum distribution requirements¹²² and the taxable expenditure rules enumerated at the beginning of this chapter.

A grant to a foreign government and any agency or instrumentality thereof is also treated as a grant to a public charity. Certain international organizations also qualify as public charities, such as the World Health Organization, the United Nations, the International Bank for Reconstruction and Development, the International Monetary Fund, and others designated by the president.¹²³

A foreign organization with more than 15 percent of its gross income from U.S. sources is entitled to seek recognition of tax-exempt status by filing Form 1023.¹²⁴ In doing so, the foreign organization relieves its potential foundation funders of the burden to obtain information necessary to follow either the equivalency or the expenditure responsibility procedures. The tax treaty between Mexico and the United States, effective in 1994, establishes a protocol under which Mexican charitable organizations can be recognized as public charities for private foundation purposes. The treaty between Canada and the United States provides that Canadian charities are given reciprocal classification under U.S. rules. However, unless the Canadian organization provides proof of its public charity status, it is presumed to be a private charity. Private foundations that are interested in supporting charitable activities in other foreign countries should be alert for similar provisions in income tax treaties affecting the status of such organizations.¹²⁵

IRS recognition for a foreign organization also provides that organization an exemption from tax on its U.S.-based investment income.¹²⁶ It is important to note again that a foreign organization that receives recognition as a §501(c)(3) tax-exempt organization still does not qualify to receive charitable donations from U.S. taxpayers.¹²⁷

(b) Equivalency Procedure

A foreign charitable organization that does not have an IRS determination of its public charity status but that is substantially equivalent to, and would in fact qualify as, a public charity if it sought approval may also be treated as a public charity. A private foundation is entitled to make a good-faith determination of the foreign organization's status based on an affidavit from the foreign entity or an opinion of a tax practitioner concluding that the grantee is a qualifying public charity.

The grant agreement with the foreign organization must also contain restrictions requiring that the funding be used for strictly charitable purposes, using language stipulated in §4945 at the beginning of this chapter. The affidavit must be in English and contain the following:¹²⁸

• Detailed financial information,
• Organizational documents,
• Program activity descriptions,
• Information that evidences the foreign charity's ability to qualify as a public charity under the U.S. Tax Code, and
• Follow-up reports evidencing that its grant was spent for the purposes for which it was awarded.

As a practical matter, these documentation requirements are often difficult to satisfy. Differences in accounting systems, language, cultural patterns, and reporting systems in their own countries can lead to confusion. Though the foreign grantee may readily agree to fulfill the requirements described in the grant agreement, its understanding of the English terms may lead to an unintended result.

To relieve foundations of the burden of obtaining a legal opinion regarding the public status of each of its foreign grantees, an organization called Charities Aid Foundation of American (CAF) exists to serve international grantmakers.¹²⁹

(c) Expenditure Responsibility Route

Seeking the appropriate information described in the preceding subsection from a foreign organization is not simple and is often troublesome due to language, currency, and legal differences. Because of these difficulties, a private foundation will sometimes find it more comfortable to treat such foreign grants as expenditure responsibility grants, to avoid unexpected results. The paperwork may be reduced and the possibility for a taxable expenditure lessened. Regulations entitled “Grants to nonpublic organizations” can be studied to gain clarity on this complex subject.¹³⁰

The Council on Foundations publishes a guide for international grantmakers.¹³¹ Charities Aid Foundation of America, known as CAF America, based in Boston, provides technical service and support to assist corporations, foundations, and individuals support global philanthropy.¹³² Lastly, the U.S. Treasury Department list of specially designated global terrorists should be reviewed to ensure that potential grantees are not on the list.¹³³

Due to the difficulties, the aforementioned guidance, and the more recent issues involving terrorist activities, many foundations now choose to exercise expenditure responsibility over grants to foreign organizations following procedures outlined in the next subsection.

(a) Pre-Grant Inquiry

To exercise expenditure responsibility, a foundation must take very specific steps, using the control checklist in Exhibit 17.6. All eight specific requirements listed in Exhibit 17.6 must be followed. The first step in exercising expenditure responsibility is to investigate the grantee organization and its proposed project by performing a pre-grant inquiry to gather the information shown in Exhibit 17.7. A pre-grant inquiry is a limited investigation directed at obtaining enough information to give a reasonable person assurance that the grantee will use the grant for the proper purposes.¹⁴⁹

The inquiry should concern itself with matters such as these:

• The identity, prior history, and experience (if any) of the grantee organization and its managers. Is the other organization capable of accomplishing the grant purposes?
• Information about the management, activities, and practices of the grantee organization, obtained either through the PF's prior experience and association with the grantee or from other readily available sources.

The scope of the inquiry is expected to be tailored to the particular grantee's situation, the period over which the grant is to be paid, the nature of the project, and the PF's prior experience with the grantee.¹⁵⁰ Two examples of successful inquiries follow:¹⁵¹

1. A PF is considering a grant to a newly created drug rehabilitation center located in a neighborhood clinic and classified as a §501(c)(4) organization because it is an “action” organization.¹⁵² One of its directors, they are informed, is an ex-convict. The PF determines that he is fully rehabilitated and that the clinic organization and its board are well qualified to conduct the program, as they are members of the community and more likely to be trusted by drug offenders.

    

   SAMPLE FOUNDATION
   Do Not Proceed to Next Step Until Answers Are Yes!
   		Date	Initial
   Step 1.	Pre-grant inquiry completed.	____________	____________
   Step 2.	Establish proper terms for grant or program-related investment.	____________	____________
   Step 3.	Expenditure responsibility contract signed.	____________	____________
   Step 4.	Grant timetable prepared.	____________	____________
   Step 5.	Form 990-PF attachment prepared and submitted (Reg. §53.4945-5(d)).	____________	____________
   Step 6.	Delinquent reports or diversions investigated.	____________	____________
   Step 7.	Withhold payments if diversions occur.	____________	____________
   Step 8.	Segregate documents in a manner to ensure that they are saved for four years.	____________	____________
   Approved by: ____________		Date: ________________

    

    

   SAMPLE FOUNDATION

    

2. A grant recipient provides medical research fellowships. It has conducted the program for years and receives many other PF grants. Another foundation that supports this recipient informs the PF that it is satisfied that its grants have been used for the purposes for which they were made.

If the grantee has received prior expenditure responsibility grants from the PF and has satisfied the reporting requirements, a pre-grant inquiry is not necessary. Likewise, for a grant to a split-interest trust that is required by its instrument to make payments to a specified public charity, a less extensive inquiry may be suitable. It is imperative that Exhibit 17.6 be used to monitor the information gathered that forms the basis for the grant decision based on the pre-grant inquiry.

(b) Grant Terms

An appropriate officer, director, or trustee of the grant recipient must sign a written commitment of the sort displayed in Exhibits 17.8 and 17.9 that, in addition to stating the charitable purposes to be accomplished, obligates the grantee to do the following:¹⁵³

• Repay any portion of the amount granted that is not used for the purposes of the grant.
• Submit full and complete annual reports on the manner in which the funds are spent and the progress made in accomplishing the purposes of the grant.
• Maintain records of the receipts and expenditures and make its records available to the grantor at reasonable times.
• Not use any of the funds for electioneering, lobbying, granting to an individual or organization, or other purposes that would result in taxable expenditures if made directly by the private foundation.

The agreement should clearly state the purpose for the grant. When making a grant to an organization that is not a §501(c)(3), the private foundation must require the grantee to establish its status, and maintain all grant funds in a separate fund dedicated to the charitable purposes for which the grant is made.

Program-Related Investments. In addition to the previously listed required information, the recipient of program-related investment funds must also agree to do the following:¹⁵⁴

• Repay the funds not invested in accordance with the agreement to the extent permitted by applicable law concerning distributions to holders of equity interests.
• Submit financial reports of a type ordinarily required by commercial investors under similar circumstances, and a statement that it has complied with the terms of the investment.
• Maintain books and records of a type normally required by commercial investors.

Program-related investments often provide financing for projects of a business nature, such as real estate development or scientific research. Funds expended by such projects might not necessarily be considered charitable expenditures if the foundation paid the expenses itself. Therefore, the expenditure responsibility agreement for such investments does not have to contain a requirement that the grantee not use the funds to engage in a noncharitable purpose, though the PF's reason for making the investment should be to accomplish a charitable purpose.

Foreign Grants. An agreement with a foreign entity should phrase the restrictions in appropriate terms under foreign law or custom. Though not specifically required, an affidavit or opinion of a tax practitioner stating that the agreement is valid under the foreign laws is “sufficient.”¹⁵⁵ Translation of the agreement into applicable languages may be appropriate. Making the choice to exercise expenditure responsibility rather than seek an equivalency opinion for foreign grantees should be made in view of the latest guidance on this issue.¹⁵⁶

(c) Grantee Reports

A private foundation that makes an expenditure responsibility grant is not held responsible for the actual accomplishment of the purposes of such a grant, but is required to follow the steps listed in Exhibit 17.6 to document its efforts to monitor its written requirement that the funds be expended for charitable purposes.¹⁵⁷ Details must be provided for each grant for which any amount or any report is outstanding at any time during the taxable year in the foundation's annual Form 990-PF, as illustrated in Exhibit 17.10. See Exhibit 17.11 for grantee reports that contain such information.

The foundation must require the grantee to submit an annual report of the sort shown in Exhibit 17.11 to document its expenditures and accomplishments each year under the expenditure responsibility agreement.

In monitoring such grants, the foundation may rely on reports and records furnished by grantees and statements of grantee officials. The grantor need not conduct any independent verification of such reports unless it has reason to doubt their accuracy or reliability.¹⁵⁸ The grantee should report on the use of the grant funds, reflecting the nature of the expenditures—salaries, travel, supplies, and so on. For a general support grant, an annual financial report or Form 990-PF (or 990) may be sufficient. In addition to financial information, the report should state that the grantee complies with the terms of the grant and describe the progress made by the grantee toward achieving the purposes for which the grant was made. The reports are to be made at the end of the grantee's fiscal year for each year the grant is outstanding and should be received within a reasonable time after the close of the year. For multiyear grants, a final report summarizing all expenditures should be submitted.¹⁵⁹

SAMPLE FOUNDATION—GRANT AGREEMENT

 

 

Terms of Grant:

1. Funds granted will be expended only for the purposes for which the grant is being made.
2. Because we are both private foundations, we ask that you not count the spending of our grant as a qualifying distribution because we plan to do so.
3. Further, we require that our funds be spent by the last day of the fiscal year in which you receive your grant. You will notify us if there are any changes in your plans. ANY FUNDS NOT PAID IN A TIMELY FASHION OR SO USED MUST BE RETURNED TO SAMPLE FOUNDATION.
4. A financial report attested to by an independent accountant must be furnished annually by _____ (date). The report should verify that the funds were expended in a timely manner, along with a narrative report of accomplishments and any reports, publications, or other materials prepared in connection with the project.
5. Financial records pertaining to the grant must be maintained in accordance with generally accepted accounting principles. Receipts and other documentation in connection with the grant will be maintained for at least four years and be open to our inspection at any time during that period.
6. No funds may be used to
   1. Carry on propaganda, or otherwise attempt to influence legislation (as defined by IRC §4945)
   2. Influence the outcome of any specific public election, or carry on, directly or indirectly, any voter registration drive (as defined in IRC §4945)
   3. Make an individual grant or re-grant funds to another organization unless the requirements of IRC §4945 are met
   4. Advance any purpose other than one specified in IRC §170(c)(2)(B)
7. If Sample Foundation becomes aware that the funds are not being used for the purposes described above, we reserve the right to ask to be reimbursed for the amounts so diverted, and will withhold any future grant payments.

Acknowledged by:

_____________________	_____________________
For Sample Foundation	For Grantee Organization
_____________________	_____________________
Date	Date
__________________________________________

Endowment Grants. A grant of endowment funds or funds for the purchase of capital equipment or other capital purposes must be monitored for the year of the grant and for the two following years. The use of the principal and income (if any) from the grant funds is to be reported.¹⁶⁰ Such grants are generally outstanding for 990-PF purposes for three years. Only if it is reasonably apparent before the end of the second succeeding year that the funds have been used for the purpose granted can the reports be suspended.

Program-Related Investments. A grantee report must be received for each year during which the investment is in existence. The Charles Stewart Mott Foundation found out the hard way that program-related investments must be reported for the life of the loan or as long as the investment is held (in its case, 12 years).¹⁶¹ The Mott Foundation had relied on the three-year endowment reporting requirement. A program-related investment (PRI) is treated as a grant for purposes of determining whether expenditure responsibility has to be exercised in connection with the disbursement.¹⁶² Thus, a PRI placed with a public charity does not require that ER agreements be made.

Private Foundation Successor Organizations. A private foundation that distributes part of its assets to another private foundation that is not controlled by the same persons in a termination distribution¹⁶³ has a duty to exercise expenditure responsibility indefinitely until all of its assets are distributed.¹⁶⁴ The responsibility ceases when the foundation gives away all of its assets.

Grantee Accounting Records. A private foundation grantee classified as a charity under §501(c)(3) need not segregate funds or maintain separate bank accounts or books for the grant unless the grantor foundation requires it to do so. If the funds are not specifically segregated, grants received within a year are deemed to be expended before grants received in a succeeding year. Expenditures made during the year are allocated among all such grants.

A grantee that is not a §501(c)(3) organization, however, must segregate and maintain, so long as grant funds remain unexpended, the grant in a separate fund dedicated to the charitable purposes of the grant.¹⁶⁵ For all grantees, records evidencing the manner in which the funds are expended must be maintained for at least four years after completion of the use of the funds.

(d) Reporting to the IRS

For each year during which a private foundation has an “outstanding” expenditure responsibility grant, information about each grant must be submitted as an attachment to Form 990-PF. The report is due in the year the grant is made and for as many years as the grant is outstanding, and monitoring is required.¹⁶⁶ An example of the report required to be attached to Form 990-PF appears in Exhibit 17.11. No specific form is provided, but the regulations specify that the following data must be submitted:¹⁶⁷

• Name and address of grantee.
• Date and amount of the grant.
• Purpose of the grant.
• Amounts expended by grantee based upon the most recent report.
• Whether (to the knowledge of the grantor) the grantee has diverted any portion of the funds, or income therefrom in the case of an endowment, from the intended purpose.
• Dates of any reports received from the grantee.
• Dates and results of any verification of grantee reports undertaken because the PF doubted their accuracy or reliability.

The IRS has strictly enforced the expenditure responsibility reporting requirement. Before 1984, reporting the information on an amended return did not correct the taxable expenditure.¹⁶⁸ Stiff penalties were upheld against a group of three commonly controlled organizations in the Hans S. Mannheimer Charitable Trust.¹⁶⁹ Their Form 990-PF contained no report. Under the pre-1984 rules, the foundation unsuccessfully argued that all of its internal documents, meeting transcriptions, and actual observations of the activities amounted to the exercise of expenditure responsibility. Despite the facts and the foundation's argument that its failure to report was due to unintentional oversight, the penalty assessment was upheld. Effective beginning in 1984, a mistake of this sort might be corrected without a penalty.¹⁷⁰

The foundation must retain supporting documentation for information reported in its Form 990-PF at its principal office: a copy of the agreement for each expenditure responsibility grant, all reports received from grantees, and documentation for any investigation the foundation conducted either during the pre-grant inquiry period or regarding potential diversion of the funds.

(e) Grant Diversions

Rules similar to those governing scholarship fund diversions apply to expenditure responsibility grant fund diversions. The grant is not considered to be a taxable expenditure even though the grantor foundation finds that any or all of the funds were used for improper purposes if the grantor PF does the following:

• Takes all reasonable and appropriate steps either to get the funds back or to cause the grantee to use other funds to satisfy the grant terms.
• Withholds, as soon as it discovers the problem, any further payments to the grantee until it receives the grantee's assurance that future diversions will not occur, and requires the grantee to take extraordinary precautions to prevent future diversion from occurring.¹⁷¹

If a grantee fails to make reports, a taxable expenditure will result unless the PF:

• Originally made the grant following the appropriate procedures.¹⁷²
• Complied with all reporting requirements.
• Makes a reasonable effort to obtain the required report.
• Withholds any future payments on the specific grant and on any other grants to the same grantee.¹⁷³

If the grantor foundation is treated as having made a taxable expenditure because it failed to take any of the required steps in the preceding list, the penalty will be imposed on the initial grant. If additional funds are granted after it discovers the problem, the penalty is imposed on all payments.

Section 1 – General Applicant Information

Last Name: __________________First Name: _________________ Middle Initial: _____________

Home Address: _____________________________________ Apartment No. __________________

City: ________________ State: _______________ Zip: ______________ Phone: ________________

Section 2 – Information About the Applicant's Household

List the full name, date of birth, relationship, and the last four digits of the social security number of each person living in your household, including yourself, as reported on your tax return. Attach additional sheet(s) if necessary.

	Your full name (first, middle, last):	Date of Birth	Last 4 Digits of S.S.#
		_____ / _____ / _____
	Full name of the 2nd person in your household (first, middle, last):	Date of Birth	Last 4 Digits of S.S.#
		_____ / _____ / _____
	Relationship to you:
	Full name of the 3rd person in your household (first, middle, last):	Date of Birth	Last 4 Digits of S.S.#
		_____ / _____ / _____
	Relationship to you:
	Full name of the 4th person in your household (first, middle, last):	Date of Birth	Last 4 Digits of S.S.#
		_____ / _____ / _____
	Relationship to you:
	Full name of the 5th person in your household (first, middle, last):	Date of Birth	Last 4 Digits of S.S.#
		_____ / _____ / _____
	Relationship to you:
	Full name of the 6th person in your household (first, middle, last):	Date of Birth	Last 4 Digits of S.S.#
		_____ / _____ / _____
	Relationship to you:

Section 3 – Information About the Emergency

Name of Applicant: ____________________________

Approximate Date of Emergency: _____________________________________________

Complete column A of the attached Needs Assessment Form and briefly describe the nature of the emergency below:

Section 4 – Applicant's Declaration

I affirm that I meet the eligibility requirements for emergency assistance described above and that all the information I have provided to qualify for such assistance is complete, correct, and true to the best of my knowledge. Any losses I may have suffered in connection with this emergency have not been covered to date by insurance, funds available through governmental or other agencies, federal or state relief funds, or readily available personal financial resources. I understand that I may be denied assistance if any of the above is false, and that I may be required to repay any assistance that I receive based on false or incomplete information.

Upon request, I agree to provide the Foundation or its Administrator with evidence of the information I have given on this application. I understand that this application becomes the property of the Foundation when submitted.

I understand that the Foundation's annual return is open to public inspection and that, if I receive a grant, the Foundation will be required by federal tax law to disclose on its annual return my identity and address, the grant amount, and a description of the grant purpose. I understand that, if I receive a grant, the Foundation will report on its annual return the address I provided above unless I provide my business address below to be used in place of my home address.

 Stop here – you have completed your part of this application.

Return this completed application to the person who gave it to you.

Applicant Information

The IRS requires that a granting foundation record the grant recipient's need for assistance at the time of the grant, and the name, address, and amount distributed to each grant recipient. Accordingly, this information is requested solely to assist the foundation in documenting and assessing the applicant's need for assistance.

Sections 1 –  5, to be completed by the applicant, request the applicant's contact information as well as details regarding household income and net worth. The applicant is also asked to explain the need for hardship assistance and how he or she intends to spend the grant funds.

The applicant acknowledges that a granting foundation is required to make its annual return open to public inspection and that the granting foundation may be required by IRS rules to disclose his or her identity, address, the grant amount, and the grant purpose.

If the applicant is awarded a grant, the Foundation may decide to pay all or a portion of such award directly to a third party creditor to whom the applicant has a liability, such as a utility company, landlord, or healthcare provider. In that case, the Foundation will provide the applicant with a Check Editing Authorization Form to be completed for each payee. Please note that checks made payable to third parties cannot be designated for travel, study, or similar purposes, as grants made for such purposes normally require advance IRS approval.

Referral Information

Sections 6A and 6B, to be completed, as applicable, by a referral source, confirms the need for assistance by an unrelated party.

Foundation Assessment and Approval

The IRS requires that a granting foundation record the objective criteria applied to assess an applicant's financial distress and the process by which a grant recipient is selected. Accordingly, the grant amount is expected to vary depending on the applicant's level of need.

Section 7, to be completed by the Foundation, explains how the applicant was selected over other applicants and how the board became aware of the need for assistance. This section also establishes that no substantial contributor to the Foundation, nor any of the Foundation's officers and/or directors and members of their respective families or households, will benefit, directly or indirectly, from the making of the grant.

Application for Hardship Assistance (Lower‐Income Households)

Section 1 – General Applicant Information

Last Name: ____________ First Name: ___________ Middle Initial: _________________

Home Address: ______________________________ Apartment No. ________________

City: ________________________ State: _______ Zip: _______ Phone: _____________

Email: ____________________

Section 2 – Information About the Applicant's Household

List the full name, date of birth, relationship, and the last four digits of the social security number of each person living in your household, including yourself, as reported on your tax return. Attach additional sheet(s) if necessary.

	Your full name (first, middle, last):	Date of Birth	Last 4 Digits of S.S.#	Annual Income
		_____ / _____ / _____		$
	Full name of the 2nd person in your household (first, middle, last):	Date of Birth	Last 4 Digits of S.S.#	Annual Income
	Relationship to you:	_____ / _____ / _____		$
	Full name of the 3rd person in your household (first, middle, last):	Date of Birth	Last 4 Digits of S.S.#	Annual Income
	Relationship to you:	_____ / _____ / _____		$
	Full name of the 4th person in your household (first, middle, last):	Date of Birth	Last 4 Digits of S.S.#	Annual Income
	Relationship to you:	_____ / _____ / _____		$
	Full name of the 5th person in your household (first, middle, last):	Date of Birth	Last 4 Digits of S.S.#	Annual Income
	Relationship to you:	_____ / _____ / _____		$
		TOTAL ANNUAL INCOME		$

Section 3 – Net Worth of Applicant's Household

When filling out the chart below, please provide the total assets and loans/debts of all members of the applicant's household.

ASSETS	LOANS
Savings	Credit Card Debt
$	$
IRA(s)	Car Loans
$	$
Value of Real Estate	Mortgage
$	$
Other Assets (Cars, etc.)	Other Loans (Student Loans, etc.)
$	$
Total Assets	Total Loans/Debts
$	$
NET WORTH (TOTAL ASSETS – TOTAL LOANS/DEBTS) $

Section 7 – Foundation Assessment and Approval

How did the Foundation become aware of this applicant's need for hardship assistance?

Please check all boxes that apply:

Through a clergyman or religious institution Through a social worker or government agency

Through a social assistance program Through a public/community charity

Through other means (briefly describe) __________________________________

Please indicate the factors that influenced the Foundation to provide hardship assistance to this particular applicant and/or household based on the applicant's description of need and input provided by the above referral source(s):

Please check all boxes that apply:

This applicant has no “safety net,” such as nearby family or friends, who can offer assistance.

This applicant has a large number of dependents.

This applicant (or a member of the household) is gravely ill and requires medical attention.

This applicant (or a member of the household) is physically disabled or handicapped.

This applicant (or a member of the household) is emotionally traumatized/psychologically fragile.

This applicant (or a member of the household) is of advanced age.

Other: _______________________________________________________________

 

 

 

 

Amount of Hardship Grant

The Foundation may give an individual or household a maximum of $5,000 in any 12‐month period, which may be paid to the applicant, to creditors on behalf of the applicant, or to a combination of the two. Please indicate below the total amount of assistance that the Foundation has approved for the applicant.
Check here if any portion of the grant funds should be made payable and sent directly to one or more creditors on the applicant's behalf. Please attach a completed Check Editing Authorization Form for each creditor.	Total portion of grant funds to be made payable to one or more third party creditor(s):
		$ _________________________
Check here if any portion of the grant funds should be made payable directly to the applicant. Delivery options (please check one) Send check directly to the applicant; or Send check to me to deliver to the applicant	Portion of grant funds to be made payable to applicant:
		$ _________________________
TOTAL GRANT APPROVED
		$ _________________________

By signing below, I certify that I am authorized to sign this application on behalf of the below named foundation. As such, I declare that no substantial contributor to the Foundation, nor any of the Foundation's officers, directors, and/or trustees and members of their respective families or households, will benefit, either directly or indirectly, from the making of this gift. I further declare that the Foundation has not required the applicant to use the proceeds of this gift for travel, study, or similar purposes. I also declare that the proceeds of this gift will not be used to influence legislation or the outcome of any specific public election or to finance voter registration drives. Moreover, I declare that the proceeds of this gift will not be used to satisfy the charitable pledge or obligation of any “disqualified person” with respect to the Foundation, as that term is defined in Section 4946 of the Internal Revenue Code.

Finally, if I have instructed Foundation Source above to send the grant check to me for delivery, I further agree to deliver such check to the applicant promptly upon receipt, and no later than the last day of the Foundation's tax year in which I receive the check. In this event, I understand that the Foundation relies upon delivery on or before this deadline for tax reporting purposes, and Foundation Source will have no liability whatsoever in the event that such delivery is not made on a timely basis.

Name of Foundation ____________________________________________________

                                                                                                Please Print

Name of Authorized Person_____________________ Title:_______________________

                                                                   Please Print

SIGN HERE > _______________________ DATE > _________________________

 Please mail this completed application to Foundation Source at 55 Walls Drive, 3rd Floor, Fairfield, CT 06824, fax it to us at 800‐839‐1764, or email to your Private Client Advisor.

Faxing or emailing this application will enable us to process it without delay, but please be sure to mail us the original signed document for the Foundation's records. If you have any questions about how to fill out this application, please call Foundation Source at 800‐839‐1754 or contact your Private Client Advisor.

ABOUT FOUNDATION SOURCE

www.foundationsource.com

Foundation Source is the nation's largest provider of comprehensive support services for private foundations. Our complete outsourced solution includes foundation creation (as needed), administrative support, active compliance monitoring, philanthropic advisory, tax and legal expertise, and online foundation management tools.

Now in our second decade, Foundation Source provides its services to more than 1,500 family, corporate, and professionally staffed foundations, of all sizes, nationwide. We work in partnership with wealth management firms, law firms, accounting firms, and family offices as well as directly with individuals and families. Foundation Source is headquartered in Fairfield, Connecticut.

Have a question? Call 800.839.0054 or send us an email at [email protected].

55 Walls Drive, Fairfield, CT 06824

T 800.839.0054

F 800.839.1764

www.foundationsource.com