Grantmaking

Q1: Does a grantee's tax status affect a foundation's ability to make a grant to that organization?

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This is part of "What Every Grantmaker Should Know & Frequently Asked Legal Questions."

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Public charities and private foundations are required to ensure that any grants they make are used to further their exempt purposes. In general, grants to other Section 501(c)(3) public charities and private foundations further a public charity's exempt purposes, so a public charity can make a grant without any restriction; however, special rules apply to grants from donor-advised funds (see Community Foundations Q7), and grants to and from supporting organizations (see Private Foundations vs. Public Charities Q1).

Subject to the exceptions noted above, a public charity can make a grant to an organization that is not described in Section 501(c)(3) of the Internal Revenue Code (e.g., a for-profit corporation, a trade association, a social welfare organization or a foreign charity) to perform activities that further the public charity's exempt purposes, but the public charity should enter into a grant restriction agreement pursuant to which the recipient agrees to use the funds in furtherance of the grantor public charity's exempt purposes.

Additionally, private foundations must exercise "expenditure responsibility" for grants to any organization that is not described in Section 501(c)(3) and to Type III non-functionally integrated supporting organizations and to Type I and Type II "controlled" supporting organizations. To exercise expenditure responsibility, the private foundation must establish monitoring procedures to ensure that the grant funds are used solely for the purpose for which the grant was made, which includes, but is not limited to, obtaining full and complete reports from the grantee on how the funds are spent (see Q7).

Q2: May a foundation make a grant to a private foundation?

In general, a public charity, as opposed to a donor-advised fund, may make a grant to a private foundation without any restrictions. In contrast, a private foundation may make a grant to another private foundation only when the granting private foundation exercises "expenditure responsibility" over the grantee's use of the grant (see Q7).

Q3: May a foundation make a grant to a tax-exempt organization that is not tax-exempt under Section 501(c)(3) of the Code (e.g. Section 501(c)(4) or 501(c)(6))?

Most public charities may make a grant to an organization that is exempt from federal income tax under another section of the Code (e.g. Section 501(c)(4) social welfare organization or Section 501(c)(6) trade association) provided the public charity enters into a grant restriction agreement pursuant to which the recipient agrees to use the funds in furtherance of the grantor public charity's exempt purposes. If such a grant is made by a donor-advised fund or a private foundation, the grantor must exercise "expenditure responsibility" over the grantee's use of the grant (see Q7).

Q4: May a foundation make a grant to a foreign charity that is not exempt under Section 501(c)(3) of the Code?

A public charity, as opposed to a donor-advised fund, may make a grant to a foreign charity provided the public charity enters into a grant restriction agreement pursuant to which the recipient agrees to use the funds in furtherance of the grantor public charity's exempt purposes.

In contrast, a private foundation may make a grant to a foreign charity provided it either (a) makes a good faith determination that the foreign entity could be recognized under Section 501(c)(3) as a public charity, even if it has not obtained an exemption determination; or (b) exercises "expenditure responsibility" over the grantee's use of the grant (see Q7). A donor-advised fund usually must exercise expenditure responsibility to make a grant to a foreign charity.

Q5: May a foundation make a grant to a for-profit corporation?

A public charity, as opposed to a donor-advised fund, may make a grant to a for-profit corporation, provided the public charity enters into a grant restriction agreement with the grantee pursuant to which the grantee agrees to use the grant for the public charity's exempt purposes. If a private foundation or a donor-advised fund makes such a grant, the private foundation must exercise "expenditure responsibility" over the grantee's use of the grant (see Q7).

Q6: May a foundation make a grant to a public charity serving as the fiscal agent for another entity?

Customarily, an organization that has not yet incorporated and/or has not yet obtained recognition as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code may make an arrangement with an established public charity to serve as its fiscal agent.

A public charity serving as fiscal agent may receive individual donations and grants intended for the other entity. However, the donor will only receive a tax deduction if the public charity with section 501(c)(3) status has control over the final decision to use the funds to support the other entity. Although the donor can indicate a preference that the donation support the other entity, donors should be careful not to earmark their contributions for distribution to the intended entity. As fiscal agent, the public charity manages the funds.

A public charity may make a grant to a public charity that serves as a fiscal agent for another entity without restriction provided the public charity, in its capacity as fiscal agent, ensures that such funds are being used for exempt purposes. Further, as a result of the fiscal agent arrangement, private foundations making a charitable contribution to the fiscal agent need not exercise "expenditure responsibility" because the grant is given to the public charity (rather than the entity awaiting tax-exempt status).

Q7: What is "expenditure responsibility"?

Private foundations must exercise "expenditure responsibility" for grants to any organization that is not described in Section 501(c)(3) and to Type III non-functionally integrated supporting organizations, and Type I and Type II "controlled" supporting organizations are prohibited from making a grant to an organization that is not a public charity. To exercise expenditure responsibility, the private foundation must establish monitoring procedures to ensure that the grant funds are used solely for the purpose for which the grant was made, which includes, but is not limited to, obtaining full and complete reports from the grantee on how the funds are spent. In addition, a private foundation is required to summarize the status of each grant over which it exercises expenditure responsibility on its IRS Form 990-PF that is filed annually with the Internal Revenue Service. (Preparation of this return may require the assistance of an attorney or accountant.)

Given the additional documentation and reporting requirements associated with the exercise of expenditure responsibility, many private foundations have voluntarily chosen to award grants only to public charities; however, such a limitation is not legally required.

Q8: Can a foundation make a grant for any purpose?

Public charities and private foundations are required to ensure that any grants they make are used to further their exempt purposes. In addition, private foundations are prohibited from directly or indirectly making grants for the following purposes:

  • To carry on propaganda, or otherwise to attempt to influence legislation.
  • To influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive, with certain very limited exceptions.
  • To an individual for travel, study or other similar purposes, unless certain requirements are satisfied, including the obtaining of advance approval from the IRS.

Q9: May a foundation make a grant to an organization or otherwise engage in activities to influence legislation?

See Lobbying Q3 and Q4.

Q10: May a foundation make a grant to a group that lobbies?

See Lobbying Q3.

Q11: May a foundation make a grant to influence the outcome of a specific election or a voter registration drive?

As organizations described in Section 501(c)(3), public charities and private foundations are prohibited from participating in, or intervening in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. Consequently, a public charity or private foundation is strictly prohibited from making a grant to another entity in order to support that entity's attempt to influence the outcome of an election.

Public charities and private foundations may provide support for voter education or voter registration drives; however, it is impermissible to fund such activities if they are overtly or implicitly partisan in the persons targeted or the messages conveyed. Voter education or voter registration activities may be considered nonpartisan if they are carefully designed and implemented to ensure that a) the activities are not targeted to a particular group based on the way that group tends to vote, and b) there is no express or implied support for (or opposition to) a candidate or political party or positions associated with a candidate or political party. For example, it is not permissible to fund a voter registration drive that encourages votes for "pro-life" candidates.

Private foundations considering providing support for voter education or voter registration activities must be aware that there are very specific additional legal restrictions applicable to private foundations that impose onerous requirements on nonpartisan voter education or voter registration activities (e.g. that the activities must be carried on in five or more states). Due to the complex requirements imposed by these laws, private foundations should seek legal advice before providing any such support.

Q12: May a foundation make a grant to an individual for travel, study or similar purpose?

A public charity, as opposed to a donor-advised fund, may make a grant to an individual provided the public charity enters into a grant restriction agreement pursuant to which the recipient agrees to use the funds in furtherance of the public charity's exempt purposes.

In contrast, a private foundation is prohibited from making a grant to an individual for travel, study or similar purposes, unless the grant satisfies numerous criteria, including that the grant is made pursuant to a procedure approved in advance by the IRS and is used to undertake activities that are consistent with the private foundation's exempt purpose. A grant to an individual for purposes other than travel, study or similar purposes is not a taxable expenditure but must otherwise qualify as a charitable grant (e.g., a grant to an indigent individual to meet basic needs).

A private foundation also must follow specific record retention requirements for grants to individuals. These requirements do not apply to other types of grants (see Annual Reporting and Public Disclosure).

For More Information

See also What Every Grantmaker Should Know: Grantmaking.