B. Examination Tips

(1) When examining the foundation, review all the expenditures and determine which

expenditures constitute grants to organizations. If any of the grantee organizations are not organizations listed in Section 4945(d)(4)(A), then the grants are subject to expenditure responsibility in accordance with Section 4945(h). These grants must be reviewed in further detail to determine if all three conditions of expenditure responsibility are met.

(2) Examine to see if the foundation, if it makes grants to individuals for travel, study,

or other similar purposes, submitted the Form 8940 to request approval of its grant-making procedures. Requests for advance approval may be made either as part of an exemption application or by separate ruling request.

(3) Determine if the person or group of persons who select recipients of the grant can

derive a private benefit, either directly or indirectly, if certain potential grantees are selected over others.

(4) Determine if the four requirements of grants to individuals were followed:

a. The grant is awarded on an objective and nondiscriminatory basis,

b. The grant is made pursuant to a procedure approved in advance by the IRS,

and

c. The grant constitutes a scholarship or fellowship grant which would be

subject to the provisions of Section 117(a) and is to be used for study at an

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educational organization described in Section170(b)(1)(A)(ii) (see Section 4945(g)(1)); or

d. The purpose of the grant is to achieve a specific objective, produce a report

or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee. See Section 4945(g)(3).

(5) Determine if the foundation’s approved grant-making procedures were followed.

(6) Determine if the grant recipients are related to any foundation disqualified

persons.

(7) Review (sample) the files of grant recipients and those denied grants to ensure

the grants were made in a non-discriminatory basis, and the grant process was adhered to.

(8) Determine if the foundation has monitoring procedures to ensure the grant

proceeds are being used in furtherance of the purposes for which it was originally granted.

(9) If the grantor is unable to provide documentation to show it meets expenditure

responsibility for applicable grants, propose the first tier tax and request correction.

(10) Part XV of Form 990-PF should list the name, address and foundation status of

all grant recipients. Review the grantees for any that may have foreign addresses. The tax-exempt status of an organization can be verified by using EO Select Check (Pub. 17).

(11) If the foreign organization does not have a determination letter, then ask the

private foundation if it has an equivalency determination for the foreign organization. If provided, verify that a qualified tax practitioner prepared the equivalency determination, that it contains current information, and that it appears reasonable.

(12) If the private foundation was required to exercise expenditure responsibility,

Treas. Reg. 53.4945-5(d) requires the private foundation to include certain reports with the Form 990-PF. Form(s) 990-PF for the tax period(s) under examination should be reviewed for compliance.

(13) If a private foundation fails to establish that grants are qualifying distributions,

consider whether it has distributed sufficient amounts as qualifying distributions. If not, examine whether Section 4942 excise taxes should be imposed for failure to distribute income.

(14) Check the TE/GE issue snapshots for pertinent snapshots.

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