C.15. Investigation of Jeopardized or Diverted Grants

(1) A grantor private foundation must ensure that its grantees do not use the grants

for purposes other than the original exempt purposes. Where a private foundation has information indicating that all or any part of a permitted Section 4945(g) grant is not being used in furtherance of grant purposes, it is obligated to investigate. Failure to investigate and correct such abuse may result in the grants becoming taxable expenditures. While conducting the investigation, the private foundation must withhold further payments of the grant to the extent possible until any delinquent reports have been submitted. See Treas. Reg. 53.4945-4(c)(4)(i).

(2) Where the grantor private foundation determines that the grantee has used all or

part of a grant for improper purposes and the grantee has not previously diverted grant funds, that grant will not be a taxable expenditure because of the diversion, provided the private foundation complies with two conditions:

a. It takes all reasonable and appropriate steps either to recover the grant funds

or to ensure the restoration of the diverted funds and the dedication of other grant funds held by the grantee to the proper grant purposes; and

b. It withholds any further payments to the grantee after it becomes aware that a

diversion may have taken place until it receives the grantee’s assurances that future diversions will not occur. Further, it requires the grantee to take extraordinary precaution to prevent future diversions from occurring.

(3) If the private foundation fails to comply with the first condition (number 2a,

above), the amount of the taxable expenditure shall be the amount of the diversion plus the amount of any further payments to the same grantee. If the private foundation complies with condition number 2a, but not with condition 2b, the amount of the taxable expenditure shall be the amount of such further payments. See Treas. Reg. 53.4945-4(c)(4)(ii).

(4) If the grantee has previously diverted funds received from the grantor private

foundation and it determines that all or part of the grant has been used for improper purposes, the grant will not be a taxable expenditure by reason of such diversion, provided the private foundation complies with two conditions. These two conditions are identical to those described in numbers 2a and b above, except the following:

a. The private foundation may resume further payments only if the

misappropriated or diverted grant funds are recovered or restored rather than merely receiving assurance that future diversions will not occur. See Treas. Reg. 53.4945-4(c)(4)(iii).

(5) The phrase "all reasonable and appropriate steps” above, includes legal action

where appropriate. Legal action is not necessary if it would in all probability not

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result in satisfaction on execution of a judgement. See Treas. Reg. 53.49454(c)(4)(iv).

(6) Special rules apply for scholarship and fellowship grants paid to educational

organizations—see Treas. Reg. 53.4945-4(c)(5).