Criteria for Private Foundations to Make Grants to Individuals for Educational Purposes

Private foundations may make grants to individuals for educational purposes; however, the grant must be awarded on an objective and nondiscriminatory basis, be made pursuant to a procedure approved in advance by the IRS, and meet one of three tests. The tests are: (1) qualify as a scholarship under section 117 of the Internal Revenue Code, (2) qualify as a prize excludable from income under section 74(b) of the Code, or (3) have the purpose of achieving a specific objective, providing a report, or improving a literary, artistic, musical, scientific, teaching, or other skill or trade of the grantee. If the foundation does not comply with these rules, a taxable expenditure occurs.

Private foundations must not engage in taxable expenditures. If they do, significant penalties are imposed and continue to be imposed each year until the taxable expenditure is “corrected.”

A taxable expenditure is an amount paid or incurred to:

1. Carry on propaganda or otherwise attempt to influence legislation;
2. Influence the outcome of any specific public election or carry on any voter registration drive unless certain requirements are satisfied;
3. Make a grant to an individual for travel, study, or other similar purposes unless certain requirements are satisfied;
4. Make a grant to an organization (other than certain public charities or an exempt operating foundation) unless the foundation exercises expenditure responsibility with respect to the grant; or
5. Carry out a noncharitable purpose (subject to certain exceptions).

Grants to individuals for travel, study, or other similar purposes are taxable expenditures unless the grant is awarded on an objective and nondiscriminatory basis under a procedure approved in advance by the IRS, and certain requirements are met. For more information, please contact us.