D.5. Expenditure — Publication 5590

(1) A private foundation must maintain expenditure responsibility over grants it made

to organizations (other than qualifying public charities) for the grants not to be taxable expenditures. That private foundation will be exercising expenditure responsibility under Section 4945(h) if it meets three requirements. The private foundation must:

a. See that the grant is spent solely for the purpose for which made (in addition

see Pre-grant Inquiry Requirement Section 4945(h)(1) below);

b. Obtain full and complete reports from the grantee concerning the use of

funds; and

c. Submit full and detail reports describing its expenditures to the IRS.

(2) A private foundation must strictly comply with these requirements.

Example: In Hans S. Mannheimer Charitable Trust v. Comm., 93 T.C. 35 (1989), a private foundation made grants to two other private foundations. All three had been established by the same person and had offices and trustees in common. The grantor private foundation made several grants to the two other private foundations but failed to obtain annual reports from them as required by Section 4945(h)(3). Nevertheless, the grantor was informed of the activities of the grantee organizations. The Tax Court concluded that the grantor failed to exercise expenditure responsibility requirements even if it was informed of the activities of the recipients.

(3) A partial transfer of assets from one private foundation to another, including a

transfer pursuant to Section 507(b)(2), generally requires that the transferor foundation exercise expenditure responsibility with respect to the transfer, except as provided in Treas. Reg. 53.4945-5(b)(7). See Treas. Reg, 53.4945-5(c)(2). This is so even if the same persons control the two foundations. See Rev. Rul. 82-136, 1982-2 C.B. 300. If a private foundation transfers all of its assets to one or more private foundations not effectively controlled by the same persons that effectively control the transferor, then expenditure responsibility with respect to the transfer is limited as provided in Treas. Reg. 1.507-3(a)(7). If a private foundation transfers all of its assets to one or more private foundations effectively controlled by the same persons that effectively control the transferor (and thus treated as the transferor for Section 4945 purposes), then the transferor foundation need not exercise expenditure responsibility with respect to the transfer, but the transferee foundation or foundations assume responsibility for

any outstanding expenditure responsibility grants made by the transferor. See Treas. Reg. 1.507-3(a)(9) and Rev. Rul. 2002-28, 2002-1 C.B. 941.