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Private Foundation Grant Procedures to Nonprofits with Key Personnel

Written by: Mark B Weinberg

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Posted about 3 years ago. 1 helpful vote, 0 comments

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OVERVIEW

The key question is whether such a grant is construed as being made to an individual, and is thus subject to the private foundation taxable expenditure rules, or whether it is a grant to an organization in which case, assuming the grantee is a public charity, the grant would not be considered a taxable expenditure.

LAW

Under Internal Revenue Code §§ 4945(d)(3) and 4945(g), as implemented by Treasury Regulation § 53.4945-4(a), a private foundation grant to an individual for study or research is generally a taxable expenditure (and thus taxed and ultimately prohibited) unless the grant: (A) is awarded on an objective and nondiscriminatory basis; (B) meets specific criteria for scholarships, awards, or educational objectives; and (C) is made under procedures approved in advance by the Commissioner of the Internal Revenue Service. Internal Revenue Code § 4945(d)(4) provides, in pertinent part, that a private foundation grant to an organization is a taxable expenditure unless: (A) the organization is described under Code § 509(a)(1), (2), or (3) ["Public Charities", which for this purpose includes the Federal government, States and their political subdivision]; or (B) the private foundation exercises expenditure responsibility. Under Treasury Regulation § 53.4945-4(a)(4)(i), a pr

EXAMPLES OF HOW THE LAW WORKS: EXAMPLE 1

The following examples from IRS determinations help illustrate the meaning of these rules. Where a private foundation grant enabled a university to obtain the services of an eminent scientist selected by the university, the grant was treated as a grant to the organization, not to the individual. However, if the foundation had selected the scientist and conditioned the retention of the grant funds upon the retention of the scientist, the grant would have been treated as a grant to the individual and thus as a taxable expenditure.

EXAMPLE 2

Where a private foundation offered a grant conditioned upon a university obtaining the services of a qualified scientist, and the university (upon examining the credentials of several scientists) agreed with the private foundation's recommendation to hire a specific scientist who had originally suggested the research grant idea to the private foundation, it was not a grant to an individual because the grant was supervised and the scientist was selected by a Public Charity, even though the foundation retained the right to renegotiate the terms of the grant if there were a substantial deviation from the grant terms, such as a breakdown in the facilities or termination of the services of a qualified scientist.

EXAMPLE 3

Finally, where a professor employed by a university approached a private foundation and learned that it would entertain a proposal from the university for a particular research project involving the professor, and the professor's proposal was approved through the channels of the university and submitted as a grant project for which the university would be responsible, even though the private foundation retained the right to renegotiate the terms of the grant if this particular professor ceased to conduct the grant, the grant was not a grant to the professor because the university retained control over the selection process.

PROPER PROCEDURAL STEPS

In accordance with the authority described above, when the Foundation is considering whether to fund requests from organizations that employ a key individual to conduct a grant project, proceed as follows: (1) Where possible, make all grants to organizations, not individuals. (2) Make the grants to organizations recognized under Code section 509(a)(1), (2), or (3) (i.e. to Public Charities). (3) Do not earmark, or otherwise restrict grants for use by the organization to employ any named individual. (4) Allow the grantee organization to control the selection of any and all key individuals on a grant, although the Foundation may recommend qualified individuals.

MOST IMPORTANTLY

(5) If the success of a grant is dependent upon a certain type or level of expertise provided only by one or more specific individuals, you may include in the grant terms the requirement that the grantee advise the Foundation if there is substantial deviation from the proposal, such as the absence of key personnel or facilities, and may require the grantee to renegotiate the terms of the grant, giving them a chance to justify the use of other personnel or facilities as adequate to discharge successfully the requirements of the grant.