Reg. § 53.4945-6 Expenditures for noncharitable purposes.
(a) In general Under section the term “taxable expenditure” includes any amount paid or incurred by a private foundation for any purpose other than one specified in section . Thus, ordinarily only an expenditure for an activity which, if it were a substantial part of the organization's total activities, would cause loss of tax exemption is a taxable expenditure under section . For purposes of this section and through , the term “purposes described in section ” shall be treated as including purposes described in section whether or not carried out by an organization described in section .
(b) Particular expenditures
(1) The following types of expenditures ordinarily will not be treated as taxable expenditures under section :
(i) Expenditures to acquire investments entered into for the purpose of obtaining income or funds to be used in furtherance of purposes described in section ,
(ii) Reasonable expenses with respect to investments described in subdivision (i) of this subparagraph,
(iii) Payment of taxes,
(iv) Any expenses which qualify as deductions in the computation of unrelated business income tax under section ,
(v) Any payment which constitutes a qualifying distribution under section or an allowable deduction under section ,
(vi) Reasonable expenditures to evaluate, acquire, modify, and dispose of program-related investments, or
(vii) Business expenditures by the recipient of a program-related investment.
(2) Conversely, any expenditures for unreasonable administrative expenses, including compensation, consultant fees, and other fees for services rendered, will ordinarily be taxable expenditures under section unless the foundation can demonstrate that such expenses were paid or incurred in the good faith belief that they were reasonable and that the payment or incurrence of such expenses in such amounts was consistent with ordinary business care and prudence. The determination whether an expenditure is unreasonable shall depend upon the facts and circumstances of the particular case.
(c) Grants to “noncharitable” organizations
(1) In general Since a private foundation cannot make an expenditure for a purpose other than a purpose described in section , a private foundation may not make a grant to an organization other than an organization described in section unless
(i) The making of the grant itself constitutes a direct charitable act or the making of a program-related investment, or
(ii) Through compliance with the requirements of subparagraph (2) of this paragraph, the grantor is reasonably assured that the grant will be used exclusively for purposes described in section .
For purposes of this paragraph, an organization treated as a section organization under shall be treated as an organization described in section .
(2) Grants other than transfers of assets described in § 1.507-3(c)(1)
(i) If a private foundation makes a grant which is not a transfer of assets pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization or reorganization to any organization (other than an organization described in section except an organization described in section ), the grantor is reasonably assured (within the meaning of subparagraph (1)(ii) of this paragraph) that the grant will be used exclusively for purposes described in section only if the grantee organization agrees to maintain and, during the period in which any portion of such grant funds remain unexpended, does continuously maintain the grant funds (or other assets transferred) in a separate fund dedicated to one or more purposes described in section . The grantor of a grant described in this paragraph must also comply with the expenditure responsibility provisions contained in sections and (h) and .
(ii) For purposes of this paragraph, a foreign organization which does not have a ruling or determination letter that it is an organization described in section (other than section ) will be treated as an organization described in section (other than section ) if in the reasonable judgment of a foundation manager of the transferor private foundation, the grantee organization is an organization described in section (other than section ). The term “reasonable judgment” shall be given its generally accepted legal sense within the outlines developed by judicial decisions in the law of trusts.
(3) Transfers of assets described in § 1.507-3(c)(1) If a private foundation makes a transfer of assets (other than a transfer described in subparagraph (1)(i) of this paragraph) pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization to any person, the transferred assets will not be considered used exclusively for purposes described in section unless the assets are transferred to a fund or organization described in section (other than an organization described in section ) or treated as so described under section .
[T.D. 7215, 37 FR 23161, Oct. 31, 1972, as amended by T.D. 7233, 37 FR 28162, Dec. 21, 1972]