Wednesday, November 24, 2010

IRS Rules that Grants to Individual Employees of Grantees Are Not Taxable Expenditures

As reported in Tax Notes Today, the IRS has recently ruled that a private foundation's grant program benefiting employees of the foundation's existing grantee organizations will not cause the foundation to make taxable expenditures under Code section 4945.  The purpose of the grant program is to “promote activities that will provide personal and professional growth opportunities for employees of the Foundation's current grantee organizations in order to improve or enhance the capacity, skill, and talent of individuals who work in the nonprofit sector.”  Grant recipients could, for example, attend national conferences, participate in workshops or enroll in professional development courses.  The foundation represented that it will follow procedures to ensure proper use of grant funds. 

Code Section 4945(d)(3) defines a "taxable expenditure" to include any amount paid by a private foundation as a grant to an individual for travel, study, or other similar purposes by such individual, unless the grant satisfies the requirements of Code section 4945(g).  Under the latter section, section 4945(d)(3) does not apply to individual grants awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the IRS if the foundation demonstrates one of three conditions, the third of which is that the grant is grounded in a purpose “to achieve a specific objective, produce a report or similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee.”  The IRS ruled that the grant program satisfied this condition.  The ruling is noteworthy because it reflects a reasonably expansive interpretation of Code section 4945(g)(3). 

Private Letter Ruling 201046018 is available electronically at 2010 TNT 224-21.


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