Grants to individuals must be made in accordance with procedures approved in advance by the Internal Revenue Service.
To secure such approval, a private foundation must demonstrate in its request for advance approval that:
- Its procedure awards grants on an objective and non-discriminatory basis;
To establish that its grants to individuals are made on an objective and nondiscriminatory basis, a private foundation must award such grants under a program that meets the following criteria:
- The group from which the grantees are selected must be reasonably related to the purposes of the grant, and the group must be large enough to constitute a charitable class (unless, taking into account the purposes of the grant, only a few individuals are qualified to be grantees – as in the case of scientific research),
- The criteria used in selecting grant recipients from the potential grantees should be related to the purpose of the grant. For example, proper criteria for selecting scholarship recipients might include (but are not limited to) the following: past academic performance, performance on tests designed to measure ability and aptitude for college work, recommendations from instructors, financial need, and the conclusions the selection committee might draw from personal interviews, and
- he person or persons who select recipients of grants should not be in a position to receive a private benefit, directly or indirectly, if certain potential grantees are selected over others.
- The procedure is reasonably calculated to result in performance by grantees of the activities that the grants are intended to finance; and
- The foundation will supervise grants to determine whether grantees have fulfilled the grant terms.
Supervision of grants
To be approved in advance, a foundation’s grant procedure must provide for proper follow-up by the foundation to determine whether grantees have performed the activities that the grants are intended to finance and have not diverted grant funds away from the original purposes of the grant. A procedure meets this requirement if:
- Periodic progress reports must be made to the foundation, at least once a year, to determine whether grantees have performed the activities the grants are intended to finance,
- When these reports are not made or there are other indications that grants are not being used as intended, the foundation must investigate and take corrective action, and
- The foundation must keep records relating to all grants to individuals, including–
- Information obtained to evaluate potential grantees,
- Identification of grantees, including any relationship of the grantee to the foundation that makes the grantee a disqualified person,Disqualified Persons
For the rules relating to private foundation excise taxes, the following persons are considered disqualified persons with respect to a private foundation:
- All substantial contributors to the foundation,
- All foundation managers of the foundation,
- An owner of more than 20 percent of–
- The total combined voting power of a corporation,
- The profits interest of a partnership, or
- The beneficial interest of a trust or unincorporated enterprise, which is, during the ownership) a substantial contributor to the foundation,
- A member of the family of any of the individuals described in (1), (2), or (3),
- A corporation of which more than 35 percent of the total combined voting power is owned by persons described in (1), (2), (3), or (4),
- A partnership of which more than 35 percent of the profits interest is owned by persons described in( 1), (2), (3), or (4),
- A trust, estate, or unincorporated enterprise of which more than 35 percent of the beneficial interest is owned by persons described in (1), (2), (3), or (4),
- For purposes of the tax on excess business holdings only, another
private foundation that either–
- is effectively controlled, directly or indirectly, by the same person or persons who control the private foundation in question, or
- receives substantially all of its contributions, directly or indirectly, from the same persons described in (1), (2), or (3), or members of their families, who made, directly or indirectly, substantially all the contributions to the private foundation in question, and
- For purposes of the tax on self-dealing only, a government official.
Indirect ownership of stock in a corporation, profits interest in a partnership, or beneficial interest in a trust, estate, or unincorporated enterprise is taken into account for determining whether:
- The stockholdings, or profits or beneficial interest, amount to more than 20 percent of the total combined voting power of the corporation or more than 20 percent of the profits or beneficial interests, or
- More than 35 percent of the total combined voting power of the corporation or more than 35 percent of the profits or beneficial interests are owned by persons described in categories (1), (2), (3), or (4).
See Attribution of ownership for more information on indirect ownership rules
- Amount and purpose of each grant, and
- Follow-up information, including required annual reports and investigation of jeopardized grants.
- No single procedure or set of procedures is required. Procedures may vary depending upon such factors as the size of the foundation, the amount and purpose of the grants, and number of recipients.
Approval is based on an evaluation of a foundation’s entire system of standards, procedures, and follow-up. Hence, separate approval for each grant program is not required. Once obtained, such approval applies to any subsequent grant program of the foundation if the procedures under which it is conducted do not differ materially from those described in the original request for approval.
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.