[Code of Federal Regulations]
[Title 26, Volume 17]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR53.4945-5]

[Page 182-190]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 53_FOUNDATION AND SIMILAR EXCISE TAXES--Table of Contents
 
                 Subpart F_Taxes on Taxable Expenditures
 
Sec. 53.4945-5  Grants to organizations.

    (a) Grants to nonpublic organizations--(1) In general. Under section 
4945(d)(4) the term ``taxable expenditure'' includes any amount paid or 
incurred by a private foundation as a grant to an organization (other 
than an organization described in section 509(a) (1), (2) or (3)), 
unless the private foundation exercises expenditure responsibility with 
respect to such grant in accordance with section 4945(h). However, the 
granting foundation does not have to exercise expenditure responsibility 
with respect to amounts granted to organizations described in section 
4945(f).
    (2) ``Grants'' described. For a description of the term ``grants'', 
see Sec. 53.4945-4(a)(2).
    (3) Section 509(a) (1), (2), and (3) organizations. See section 
508(b) and the regulations thereunder for rules relating to when a 
grantor may rely on a potential grantee's characterization of its status 
as set forth in the notice described in section 508(b).
    (4) Certain ``public'' organizations. For purposes of this section, 
an organization will be treated as a section 509(a)(1) organization if:
    (i) It qualifies as such under paragraph (a) of Sec. 1.509(a)-2 of 
this chapter;
    (ii) It is an organization described in section 170(c)(1) or 
511(a)(2)(B), even if it is not described in section 501(c)(3); or
    (iii) It is a foreign government, or any agency or instrumentality 
thereof, or an international organization designated as such by 
Executive order under 22 U.S.C. 288, even if it is not described in 
section 501(c)(3).

However, any grant to an organization referred to in this subparagraph 
must be made exclusively for charitable purposes as described in section 
170(c)(2)(B).
    (5) Certain foreign organizations. If a private foundation makes a 
grant to a foreign organization which does not have a ruling or 
determination letter that it is an organization described in section 
509(a)(1), (2), or (3), such grant will not be treated as a grant made 
to an organization other than an organization described in section 
509(a)(1), (2), or (3) if the grantor private foundation has made a good 
faith determination that the grantee organization is an organization 
described in section 509(a)(1), (2), or (3). Such a ``good faith 
determination'' ordinarily will be considered as made where the 
determination is based on an affidavit of the grantee organization or an 
opinion of counsel (of the grantor or the grantee) that the grantee is 
an organization described in section 509(a)(1), (2), or (3). Such an 
affidavit or opinion must set forth sufficient facts concerning the 
operations and support of the grantee

[[Page 183]]

for the Internal Revenue Service to determine that the grantee would be 
likely to qualify as an organization described in section 509(a) (1), 
(2), or (3). See paragraphs (b)(5) and (b)(6) of this section for other 
special rules relating to foreign organizations.
    (6) Certain earmarked grants--(i) In general. A grant by a private 
foundation to a grantee organization which the grantee organization uses 
to make payments to another organization (the secondary grantee) shall 
not be regarded as a grant by the private foundation to the secondary 
grantee if the foundation does not earmark the use of the grant for any 
named secondary grantee and there does not exist an agreement, oral or 
written, whereby such grantor foundation may cause the selection of the 
secondary grantee by the organization to which it has given the grant. 
For purposes of this subdivision, a grant described herein shall not be 
regarded as a grant by the foundation to the secondary grantee even 
though such foundation has reason to believe that certain organizations 
would derive benefits from such grant so long as the original grantee 
organization exercises control, in fact, over the selection process and 
actually makes the selection completely independently of the private 
foundation.
    (ii) To governmental agencies. If a private foundation makes a grant 
to an organization described in section 170(c)(1) and such grant is 
earmarked for use by another organization, the granting foundation need 
not exercise expenditure responsibility with respect to such grant if 
the section 170(c)(1) organization satisfies the Commissioner in advance 
that:
    (a) Its grant-making program is in furtherance of a purpose 
described in section 170(c)(2)(B), and
    (b) The section 170(c)(1) organization exercises ``expenditure 
responsibility'' in a manner that would satisfy this section if it 
applied to such section 170(c)(1) organization.

However, with respect to such grant, the granting foundation must make 
the reports required by section 4945(h)(3) and paragraph (d) of this 
section, unless such grant is earmarked for use by an organization 
described in section 509(a) (1), (2), or (3).
    (b) Expenditure responsibility. (1) In general. A private foundation 
is not an insurer of the activity of the organization to which it makes 
a grant. Thus, satisfaction of the requirements of sections 4945(d)(4) 
and (h) and of subparagraph (3) or (4) of this paragraph, will 
ordinarily mean that the grantor foundation will not have violated 
section 4945(d) (1) or (2). A private foundation will be considered to 
be exercising ``expenditure responsibility'' under section 4945(h) as 
long as it exerts all reasonable efforts and establishes adequate 
procedures:
    (i) To see that the grant is spent solely for the purpose for which 
made,
    (ii) To obtain full and complete reports from the grantee on how the 
funds are spent, and
    (iii) To make full and detailed reports with respect to such 
expenditures to the Commissioner.

In cases in which pursuant to paragraph (a)(6) of this section a grant 
is considered made to a secondary grantee rather than the primary 
grantee, the grantor foundation's obligation to obtain reports from the 
grantee pursuant to section 4945(h)(2) and this section will be 
satisfied if appropriate reports are obtained from the secondary 
grantee. For rules relating to expenditure responsibility with respect 
to transfers of assets described in section 507(b)(2), see section 
507(b)(2) and the regulations thereunder.
    (2) Pre-grant inquiry--(i) Before making a grant to an organization 
with respect to which expenditure responsibility must be exercised under 
this section, a private foundation should conduct a limited inquiry 
concerning the potential grantee. Such inquiry should be complete enough 
to give a reasonable man assurance that the grantee will use the grant 
for the proper purposes. The inquiry should concern itself with matters 
such as: (a) The identity, prior history and experience (if any) of the 
grantee organization and its managers; and (b) any knowledge which the 
private foundation has (based on prior experience or otherwise) of, or 
other information which is readily available concerning, the management, 
activities, and practices of the grantee organization. The scope of the 
inquiry might be expected to vary

[[Page 184]]

from case to case depending upon the size and purpose of the grant, the 
period over which it is to be paid, and the prior experience which the 
grantor has had with respect to the capacity of the grantee to use the 
grant for the proper purposes. For example, if the grantee has made 
proper use of all prior grants to it by the grantor and filed the 
required reports substantiating such use, no further pregrant inquiry 
will ordinarily be necessary. Similarly, in the case of an organization, 
such as a trust described in section 4947(a)(2), which is required by 
the terms of its governing instrument to make payments to a specified 
organization exempt from taxation under section 501(a), a less extensive 
pregrant inquiry is required than in the case of a private foundation 
possessing discretion with respect to the distribution of funds.
    (ii) The provisions of this subparagraph may be illustrated by the 
following examples:

    Example (1). Officials of M, a newly established organization which 
is described in section 501(c)(4), request a grant from X foundation to 
be used for a proposed program to combat drug abuse by establishing 
neighborhood clinics in certain ghetto areas of a city. Before making a 
grant to M, X makes an inquiry concerning the identity, prior history 
and experience of the officials of M. X obtains information pertaining 
to the officials of M from references supplied by these officials. Since 
one of the references indicated that A, an official of M, has an arrest 
record, police records are also checked and A's probation officer is 
interviewed.
    The inquiry also shows M has no previous history of administering 
grants and that the officials of M have had no experience in 
administering programs of this nature. However, in the opinion of X's 
managers, M's officials (including A who appears to be fully 
rehabilitated after having been convicted of a narcotics violation 
several years ago) are well qualified to conduct this program since they 
are members of the communities in which the clinics are to be 
established and are more likely to be trusted by drug users in these 
communities than are outsiders. Under these circumstances X has complied 
with the requirements of this subparagraph and a grant to M for its 
proposed program will not be treated as a taxable expenditure solely 
because of the operation of this subparagraph.
    Example (2). Foundation Y wishes to make a grant to foundation R for 
use in R's scholarship program. Y has made similar grants to R annually 
for the last several years and knows that R's managers have observed the 
terms of the previous grants and have made all requested reports with 
respect to such grants. No changes in R's management have occurred 
during the past several years. Under these circumstances, Y has enough 
information to have such assurance as a reasonable man would require 
that the grant to R will be used for proper purposes. Consequently, Y is 
under no obligation to make any further pregrant inquiry pursuant to 
this subparagraph.
    Example (3). S foundation requests a grant from Z foundation for use 
in S's program of providing medical research fellowships. S has been 
engaged in this program for several years and has received large numbers 
of grants from other foundations. Z's managers know that the reputations 
of S and of S's officials are good. Z's managers also have been advised 
by managers of W foundation that W had recently made a grant to S and 
that W's managers were satisfied that such grant has been used for the 
purposes for which it was made. Under these circumstances Z has enough 
information to have such assurance as a reasonable man would require 
that the grant to S will be used for proper purposes. Consequently, Z is 
under no obligation to make any further pregrant inquiry pursuant to 
this subparagraph.

    (3) Terms of grants. Except as provided in subparagraph (4) of this 
paragraph, in order to meet the expenditure responsibility requirements 
of section 4945(h), a private foundation must require that each grant to 
an organization, with respect to which expenditure responsibility must 
be exercised under this section, be made subject to a written commitment 
signed by an appropriate officer, director, or trustee of the grantee 
organization. Such commitment must include an agreement by the grantee:
    (i) To repay any portion of the amount granted which is not used for 
the purposes of the grant,
    (ii) To submit full and complete annual reports on the manner in 
which the funds are spent and the progress made in accomplishing the 
purposes of the grant, except as provided in paragraph (c)(2) of this 
section,
    (iii) To maintain records of receipts and expenditures and to make 
its books and records available to the grantor at reasonable times, and
    (iv) Not to use any of the funds:

[[Page 185]]

    (a) To carry on propaganda, or otherwise to attempt, to influence 
legislation (within the meaning of section 4945(d)(1)),
    (b) To influence the outcome of any specific public election, or to 
carry on, directly or indirectly, any voter registration drive (within 
the meaning of section 4945(d)(2)),
    (c) To make any grant which does not comply with the requirements of 
section 4945(d) (3) or (4), or
    (d) To undertake any activity for any purpose other than one 
specified in section 170(c)(2)(B).

The agreement must also clearly specify the purposes of the grant. Such 
purposes may include contributing for capital endowment, for the 
purchase of capital equipment, or for general support provided that 
neither the grants nor the income therefrom may be used for purposes 
other than those described in section 170(c)(2)(B).
    (4) Terms of program-related investments. In order to meet the 
expenditure responsibility requirements of section 4945(h), with regard 
to the making of a program-related investment (as defined in section 
4944 and the regulations thereunder), a private foundation must require 
that each such investment with respect to which expenditure 
responsibility must be exercised under section 4945(d)(4) and (h) and 
this section be made subject to a written commitment signed by an 
appropriate officer, director, or trustee of the recipient organization. 
Such commitment must specify the purpose of the investment and must 
include an agreement by the organization:
    (i) To use all the funds received from the private foundation (as 
determined under paragraph (c)(3) of this section) only for the purposes 
of the investment and to repay any portion not used for such purposes, 
provided that, with respect to equity investments, such repayment shall 
be made only to the extent permitted by applicable law concerning 
distributions to holders of equity interests,
    (ii) At least once a year during the existence of the program-
related investment, to submit full and complete financial reports of the 
type ordinarily required by commercial investors under similar 
circumstances and a statement that it has complied with the terms of the 
investment,
    (iii) To maintain books and records adequate to provide information 
ordinarily required by commercial investors under similar circumstances 
and to make such books and records available to the private foundation 
at reasonable times, and
    (iv) Not to use any of the funds:
    (a) To carry on propaganda, or otherwise to attempt, to influence 
legislation (within the meaning of section 4945(d)(1)),
    (b) To influence the outcome of any specific public election, or to 
carry on directly or indirectly, and voter registration drive (within 
the meaning of section 4945(d)(2)), or
    (c) With respect to any recipient which is a private foundation (as 
defined in section 509(a)), to make any grant which does not comply with 
the requirements of section 4945 (d) (3) or (4).
    (5) Certain grants to foreign organizations. With respect to a grant 
to a foreign organization (other than an organization described in 
section 509(a) (1), (2), or (3) or treated as so described pursuant to 
paragraph (a)(4) or (a)(5) of this section), subparagraph (3)(iv) or 
(4)(iv) of this paragraph shall be deemed satisfied if the agreement 
referred to in subparagraph (3) or (4) of this paragraph imposes 
restrictions on the use of the grant substantially equivalent to the 
limitations imposed on a domestic private foundation under section 
4945(d). Such restrictions may be phrased in appropriate terms under 
foreign law or custom and ordinarily will be considered sufficient if an 
affidavit or opinion of counsel (of the grantor or grantee) is obtained 
stating that, under foreign law or custom, the agreement imposes 
restrictions on the use of the grant substantially equivalent to the 
restrictions imposed on a domestic private foundation under subparagraph 
(3) or (4) of this paragraph.
    (6) Special rules for grants by foreign private foundations. With 
respect to activities in jurisdictions other than those described in 
section 170(c)(2)(A), the failure of a foreign private foundation which 
is described in section 4948(b) to comply with subparagraph (3) or (4) 
of this paragraph with respect to

[[Page 186]]

a grant to an organization shall not constitute an act or failure to act 
which is a prohibited transaction (within the meaning of section 
4948(c)(2)).
    (7) Expenditure responsibility with respect to certain transfers of 
assets described in section 507--(i) Transfers of assets described in 
section 507(b)(2). For rules relating to the extent to which the 
expenditure responsibility rules contained in section 4945 (d)(4) and 
(h) and this section apply to transfers of assets described in section 
507(b)(2), see Sec. Sec. 1.507-3(a)(7), 1.507-3 (a)(8)(ii)(f), and 
1.507-3(a)(9) of this chapter.
    (ii) Certain other transfers of assets. For rules relating to the 
extent to which the expenditure responsibility rules contained in 
section 4945 (d)(4) and (h) and this section apply to certain other 
transfers of assets described in Sec. 1.507-3(b) of this chapter, see 
Sec. 1.507-3(b) of this chapter.
    (8) Restrictions on grants (other than program-related investments) 
to organizations not described in section 501(c)(3). For other 
restrictions on certain grants (other than program-related investments) 
to organizations which are not described in section 501(c)(3), see Sec. 
53.4945-6(c).
    (c) Reports from grantees--(1) In general. In the case of grants 
described in section 4945(d)(4), except as provided in subparagraph (2) 
of this paragraph, the granting private foundation shall require reports 
on the use of the funds, compliance with the terms of the grant, and the 
progress made by the grantee toward achieving the purposes for which the 
grant was made. The grantee shall make such reports as of the end of its 
annual accounting period within which the grant or any portion thereof 
is received and all such subsequent periods until the grant funds are 
expended in full or the period of the grantee for which such reports 
shall be furnished to the grantor within a reasonable period of time 
after the close of the annual accounting period of the grantee for which 
such reports are made. Within a reasonable period of time after the 
close of its annual accounting period during which the use of the grant 
funds is completed, the grantee must make a final report with respect to 
all expenditures made from such funds (including salaries, travel, and 
supplies), and indicating the progress made toward the goals of the 
grant. The grantor need not conduct any independent verification of such 
reports unless it has reason to doubt their accuracy or reliability.
    (2) Capital endowment grants to exempt private foundations. If a 
private foundation makes a grant described in section 4945(d)(4) to a 
private foundation which is exempt from taxation under section 501(a) 
for endowment, for the purchase of capital equipment, or for other 
capital purposes, the grantor foundation shall require reports from the 
grantee on the use of the principal and the income (if any) from the 
grant funds. The grantee shall make such reports annually for its 
taxable year in which the grant was made and the immediately succeeding 
2 taxable years. Only if it is reasonably apparent to the grantor that, 
before the end of such second succeeding taxable year, neither the 
principal, the income from the grant funds, nor the equipment purchased 
with the grant funds has been used for any purpose which would result in 
liability for tax under section 4945(d), the grantor may then allow such 
reports to be discontinued.
    (3) Grantees' accounting and recordkeeping procedures. (i) A private 
foundation grantee exempt from taxation under section 501(a) (or the 
recipient of a program-related investment) need not segregate grant 
funds physically nor separately account for such funds on its books 
unless the grantor requires such treatment of the grant funds. If such a 
grantee neither physically segregates grant funds nor establishes 
separate accounts on its books, grants received within a given taxable 
year beginning after December 31, 1969, shall be deemed, for purposes of 
section 4945, to be expended before grants received in a succeeding 
taxable year. In such case expenditures of grants received within any 
such taxable year shall be prorated among all such grants.

In accounting for grant expenditures, private foundations may make the 
necessary computations on a cumulative annual basis (or, where 
appropriate, as of the date for which the computations are made). The 
rules set forth in the

[[Page 187]]

preceding three sentences shall apply to the extent they are consistent 
with the available records of the grantee and with the grantee's 
treatment of qualifying distributions under section 4942(h) and the 
regulations thereunder. The records of expenditures, as well as copies 
of the reports submitted to the grantor, must be kept for at least 4 
years after completion of the use of the grant funds.
    (ii) For rules relating to accounting and recordkeeping requirements 
for grantees other than those described in subdivision (i) of this 
subparagraph, see Sec. Sec. 53.4945-5(b)(8) and 53.4945-6(c).
    (4) Reliance on information supplied by grantee. A private 
foundation exercising expenditure responsibility with respect to its 
grants may rely on adequate records or other sufficient evidence 
supplied by the grantee organization (such as a statement by an 
appropriate officer, director or trustee of such grantee organization) 
showing, to the extent applicable, the information which the grantor 
must report to the Internal Revenue Service in accordance with paragraph 
(d)(2) of this section.
    (d) Reporting to Internal Revenue Service by grantor--(1) In 
general. To satisfy the reportmaking requirements of section 4945(h)(3), 
a granting foundation must provide the required information on its 
annual information return, required to be filed by section 6033, for 
each taxable year with respect to each grant made during the taxable 
year which is subject to the expenditure responsibility requirements of 
section 4945(h). Such information must also be provided on such return 
with respect to each grant subject to such requirements upon which any 
amount or any report is outstanding at any time during the taxable year. 
However, with respect to any grant made for endowment or other capital 
purposes, the grantor must provide the required information only for any 
taxable year for which the grantor must require a report from the 
grantee under paragraph (c)(2) of this section. The requirements of this 
subparagraph with respect to any grant may be satisfied by submission 
with the foundation's information return of a report received from the 
grantee, if the information required by subparagraph (2) of this 
paragraph is contained in such report.
    (2) Contents of report. The report required by this paragraph shall 
include the following information:
    (i) The name and address of the grantee.
    (ii) The date and amount of the grant.
    (iii) The purpose of the grant.
    (iv) The amounts expended by the grantee (based upon the most recent 
report received from the grantee).
    (v) Whether the grantee has diverted any portion of the funds (or 
the income therefrom in the case of an endowment grant) from the purpose 
of the grant (to the knowledge of the grantor).
    (vi) The dates of any reports received from the grantee.
    (vii) The date and results of any verification of the grantee's 
reports undertaken pursuant to and to the extent required under 
paragraph (c)(1) of this section by the grantor or by others at the 
direction of the grantor.
    (3) Recordkeeping requirements. In addition to the information 
included on the information return, a granting foundation shall make 
available to the Internal Revenue Service at the foundation's principal 
office each of the following items:
    (i) A copy of the agreement covering each ``expenditure 
responsibility'' grant made during the taxable year.
    (ii) A copy of each report received during the taxable year from 
each grantee on any ``expenditure responsibility'' grant, and
    (iii) A copy of each report made by the grantor's personnel or 
independent auditors of any audits or other investigations made during 
the taxable year with respect to any ``expenditure responsibility'' 
grant.
    (4) Reports received after the close of grantor's accounting year. 
Data contained in reports required by this paragraph, which reports are 
received by a private foundation after the close of its accounting year 
but before the due date of its information return for that year, need 
not be reported on such return, but may be reported on the grantor's 
information return for the year in which such reports are received from 
the grantee.

[[Page 188]]

    (e) Violations of expenditure responsibility requirements--(1) 
Diversions by grantee. (i) Any diversion of grant funds (including the 
income therefrom in the case of an endowment grant) by the grantee to 
any use not in furtherance of a purpose specified in the grant may 
result in the diverted portion of such grant being treated as a taxable 
expenditure of the grantor under section 4945(d)(4). However, for 
purposes of this section, the fact that a grantee does not use any 
portion of the grant funds as indicated in the original budget 
projection shall not be treated as a diversion if the use to which the 
funds are committed is consistent with the purpose of the grant as 
stated in the grant agreement and does not result in a violation of the 
terms of such agreement required to be included by paragraph (b)(3) or 
(b)(4) of this section.
    (ii) In any event, a grantor will not be treated as having made a 
taxable expenditure under section 4945(d)(4) solely by reason of a 
diversion by the grantee, if the grantor has complied with subdivision 
(iii) (a) and (b) or (iv) (a) and (b) of this subparagraph, whichever is 
applicable.
    (iii) In cases in which the grantor foundation determines that any 
part of a grant has been used for improper purposes and the grantee has 
not previously diverted grant funds, the foundation will not be treated 
as having made a taxable expenditure solely by reason of the diversion 
so long as the foundation:
    (a) Is taking all reasonable and appropriate steps either to recover 
the grant funds or to insure the restoration of the diverted funds and 
the dedication (consistent with the requirements of (b) (1) and (2) of 
this subdivision) of the other grant funds held by the grantee to the 
purposes being financed by the grant, and
    (b) Withholds any further payments to the grantee after the grantor 
becomes aware that a diversion may have taken place (hereinafter 
referred to as ``further payments'') until it has:
    (1) Received the grantee's assurances that future diversions will 
not occur, and
    (2) Required the grantee to take extraordinary precautions to 
prevent future diversions from occurring.

If a foundation is treated as having made a taxable expenditure under 
this subparagraph in a case to which this subdivision applies, then 
unless the foundation meets the requirements of (a) of this subdivision 
the amount of the taxable expenditure shall be the amount of the 
diversion (for example, the income diverted in the case of an endowment 
grant, or the rental value of capital equipment for the period of time 
for which diverted) plus the amount of any further payments to the same 
grantee. However, if the foundation complies with the requirements of 
(a) of this subdivision but not the requirements of (b) of this 
subdivision, the amount of the taxable expenditure shall be the amount 
of such further payments.
    (iv) In cases where a grantee has previously diverted funds received 
from a grantor foundation, and the grantor foundation determines that 
any part of a grant has again been used for improper purposes, the 
foundation will not be treated as having made a taxable expenditure 
solely by reason of such diversion so long as the foundation:
    (a) Is taking all reasonable and appropriate steps to recover the 
grant funds or to insure the restoration of the diverted funds and the 
dedication (consistent with the requirements of (b) (2) and (3) of this 
subdivision) of other grant funds held by the grantee to the purposes 
being financed by the grant, except that if, in fact, some or all of the 
diverted funds are not so restored or recovered, then the foundation 
must take all reasonable and appropriate steps to recover all of the 
grant funds, and
    (b) Withholds further payments until:
    (1) Such funds are in fact so recovered or restored,
    (2) It has received the grantee's assurances that future diversions 
will not occur, and
    (3) It requires the grantee to take extraordinary precautions to 
prevent future diversions from occurring.

If a foundation is treated as having made a taxable expenditure under 
this subparagraph in a case to which this subdivision applies, then 
unless the foundation meets the requirements of (a) of this subdivision, 
the amount of

[[Page 189]]

the taxable expenditure shall be the amount of the diversion plus the 
amount of any further payments to the same grantee. However, if the 
foundation complies with the requirements of (a) of this subdivision, 
but fails to withhold further payments until the requirements of (b) of 
this subdivision are met, the amount of the taxable expenditure shall be 
the amount of such further payments.
    (v) The phrase ``all reasonable and appropriate steps'' (as used in 
subdivisions (iii) and (iv) of this subparagraph) includes legal action 
where appropriate but need not include legal action if such action would 
in all probability not result in the satisfaction of execution on a 
judgment.
    (2) Grantee's failure to make reports. A failure by the grantee to 
make the reports required by paragraph (c) of this section (or the 
making of inadequate reports) shall result in the grant's being treated 
as a taxable expenditure by the grantor unless the grantor:
    (i) Has made the grant in accordance with paragraph (b) of this 
section,
    (ii) Has complied with the reporting requirements contained in 
paragraph (d) of this section,
    (iii) Makes a reasonable effort to obtain the required report, and
    (iv) Withholds all future payments on this grant and on any other 
grant to the same grantee until such report is furnished.
    (3) Violations by the grantor. In addition to the situations 
described in subparagraphs (1) and (2) of this paragraph, a grant which 
is subject to the expenditure responsibility requirements of section 
4945(h) will be considered a taxable expenditure of the granting 
foundation if the grantor:
    (i) Fails to make a pregrant inquiry as described in paragraph 
(b)(2) of this section,
    (ii) Fails to make the grant in accordance with a procedure 
consistent with the requirements of paragraph (b) (3) or (4) of this 
section, or
    (iii) Fails to report to the Internal Revenue Service as provided in 
paragraph (d) of this section.
    (f) Effective dates--(1) In general. This section shall apply to all 
grants which are subject to the expenditure responsibility requirements 
of section 4945(d)(4) and (h) and which are made by private foundations 
more than 90 days after October 30, 1972.
    (2) Transitional rules--(i) Certain grants awarded prior to May 27, 
1969. Section 4945(d)(4) and (h) and this section shall not apply to a 
grant to a private foundation which is not controlled, directly or 
indirectly, by the grantor foundation or one or more disqualified 
persons (as defined in section 4946) with respect to the grantor 
foundation, provided that such grant:
    (a) Is made pursuant to a written commitment which was binding on 
May 26, 1969, and at all times thereafter,
    (b) Is made for one or more of the purposes described in section 
170(c)(2)(B), and
    (c) Is to be paid out to such grantee foundation on or before 
December 31, 1974.
    (ii) Grants or expenditures committed prior to January 1, 1970. 
Except as provided in paragraph (e)(2)(i) of Sec. 53.4945-4, section 
4945 shall not apply to a grant or an expenditure for section 
170(c)(2)(B) purposes made on or after January 1, 1970, if the grant or 
expenditure was made pursuant to a commitment entered into prior to such 
date, but only if (in the case of a grant or an expenditure other than 
an unlimited general-purpose grant to an organization) such commitment 
is reasonable in amount in light of the purposes of the grant. For 
purposes of this subdivision, a commitment will be considered entered 
into prior to January 1, 1970, if prior to such date, the amount and 
nature of the payments to be made and the name of the payee were entered 
on the records of the payor, or were otherwise adequately evidenced, or 
the notice of the payment to be received was communicated to the payee 
in writing.
    (iii) Grants awarded on or after January 1, 1970. Paragraphs (b), 
(c), and (d) of this section shall not apply to grants awarded on or 
after January 1, 1970, but prior to the expiration of 90 days after 
October 30, 1972, if the grantor has made reasonable efforts, and has 
established adequate procedures such as a prudent man would adopt in 
managing his own property, to see that the grant is spent solely for the 
purpose for

[[Page 190]]

which made, to obtain full and complete reports from the grantee on how 
the funds are spent, and to make full and detailed reports with respect 
to such grant to the Commissioner. With respect to any return filed with 
the Internal Revenue Service before the expiration of 90 days after 
October 30, 1972, the grantor may treat reports which satisfy the 
requirements of the statement to be attached to Form 4720 for the year 
1970 under ``Specific Instructions--Question B'' (items (1) through (5)) 
as satisfying the grantor reporting requirements with respect to 
``expenditure responsibility'' grants. In the case of a private 
foundation required to file an annual return for a taxable year ending 
after January 1, 1970, and before December 31, 1970, the reporting 
requirements imposed by section 4945(h)(3) for such period shall be 
regarded as satisfied if such reports are made on the annual return for 
its first taxable year beginning after December 31, 1969.

[T.D. 7215, 37 FR 23161, Oct. 31, 1972; 37 FR 23918, Nov. 10, 1972, as 
amended by T.D. 7233, 37 FR 28162, Dec. 21, 1972; T.D. 7290, 38 FR 
31834, Nov. 19, 1973]