Supporting Individual Artists
A Tool Box
As grantmakers, we have choices. Finding the right tool for the job and experimenting with tools to learn the range of their usefulness is what grantmakers do.
If an arts funding objective is to support artists, several tools must be used. There is no single correct way to support individual artists. We can determine which way is best, based upon the nature and ecology of our communities and constituencies, and upon the choices artists make about how to best present themselves and their work. This article describes some of these tools: foundation grants to individuals, grants to fiscal sponsors for individuals, grants that require expenditure responsibility, and grant contracts with nonprofit organizations that regrant to individuals.
Much of the language used in this article mirrors or paraphrases portions of the text of the Internal Revenue Code, particularly Section 4945, and the Treasury Regulations, Section 53 in particular, because it is important to follow closely what the regulations permit. However, Internal Revenue Service regulations, once understood, are not impossible to navigate and need not stand in the way of a foundation's desire to support individual artists.
Foundation Grants to Individuals
Foundations are strictly regulated if they decide to make grants to individuals, and rightly so. Abuses are serious breaches of ethical practice; i.e., directing funds to employees' children or family members. The Internal Revenue Service requires the pre-approval of the process by which a foundation makes grants to individuals. Is the process sound? Are qualified people making the choices? Are self-dealing and conflicts of interest prevented?
Foundations and their managers are subject to penalty taxes if they make grants to individuals unless such grants satisfy the requirements laid out in Section 4945(G) of the code. The IRS must approve in advance the procedure by which a foundation makes grants to individuals, and the grant process must operate on an objective and nondiscriminatory basis. The IRS must be satisfied that:
- the grant constitutes a scholarship, fellowship, prize, or award;
- the recipient is selected from a defined general public;
- and the purpose of the grant is to achieve a specific objective, such as to produce a report/product or to improve or enhance a literary, artistic, musical, scientific, teaching, or other capacity, skill, or talent.
This describes nearly every type of grant an arts grantmaker might wish to make to an individual. These commitments may also be loans to individuals. Permissible grants do not ordinarily include salaries or other compensation to employees, nor do they ordinarily include educational payments to employees, or monies paid to consultants for assisting foundations in planning, evaluating, or developing projects.
The key messages the IRS takes great pains to repeat are:
- that grants to individuals need to be awarded on an objective and nondiscriminatory basis,
- in accordance with a procedure approved in advance by the IRS commissioner,
- directed to a charitable purpose, and
- authorized for an eligible general public rather than a narrowly defined group.
The group from which grantees are selected must be constituted according to criteria reasonably related to the purpose of the grant. The group of eligible individuals must be of a size sufficient to constitute a charitable class — in Jerome Foundation's case, for example, film and video artists in Minnesota and New York City. The foundation also may impose reasonable restrictions on the group of potential grantees, for example, specifying that they be emerging or that they be residents of a particular city or state.
The selection criteria for making grants to individuals need to be related to the purpose of the grant. For example, the IRS states that scholarship recipients might be judged on academic performance, test scores, instructor recommendations, references, financial need, and personal interviews. Jerome Foundation's production grant program for individual film and video artists requires a description of the particular piece to be created, an expense budget for its creation, projected income sources, samples of previous work, and rÃ©sumÃ©s.
The IRS requires that foundations obtain regular and appropriate reports from individual grant recipients, reports guaranteeing that the funds were used for the purpose for which they were awarded. Reporting procedures may vary depending upon the foundation's purpose, its size, the size of the grants program, and how many recipients are involved. Examples are described in the Code. It is important that the reports show progress made by the grantee toward achieving the purpose for which the grant was made. The foundation is obliged to investigate if reports are not received, to follow-up with multiple requests, and to withhold any remaining payments until the reports have been submitted. If funds have been diverted for improper purposes, the foundation will not be penalized if it can prove that it made every effort to recover the grant funds, insure the restoration of the diverted funds, and obtain regular reports. The foundation is expected to withhold future grant payments if the original expectations of the grant award have not been met or reports have not been filed.
The persons (panelists, jurors) who select individual grant recipients may not benefit, directly or indirectly, if certain grantees are selected over others. When foundations submit their selection process to the IRS for approval, they must take care to define the qualifications of the persons who will be selecting the individual artists.
The IRS regulations specify how a foundation should submit a request for a ruling and how it can secure advance approval of the procedures. It's important to note that the IRS is willing to issue a one-time approval of a system of standards, procedures, and follow-up that is designed to result in grants that meet its requirements. Once such approval is received, it can apply for subsequent grant programs for individuals as long as the procedures do not differ materially from those described in the original request. The Jerome Foundation has exercised this option to create other programs such as a travel and study grant program.
Grants to Fiscal Sponsors for Individuals
The IRS states that a grant by a private foundation to a nonprofit organization, which the organization uses to make payments to individuals, shall not be regarded as a grant by the private foundation to the individual grantee if:
- the foundation does not earmark the use of the grant for a named individual it chooses; and
- an agreement, oral or written, does not exist whereby the foundation causes the selection of the individual grantee by the grantee organization.
The essential element of such grants is that the grantee organization exercises control of its process to decide whether or not to sponsor the artist's proposal and makes that decision independently of the foundation. It is on this basis that arts grantmakers throughout the country engage in fiscal sponsorship programs.
The New York Foundation for the Arts has been a very active fiscal sponsor of artists. In Minnesota, Intermedia Arts is a frequent provider of fiscal sponsor services to individual artists and small groups of artists. These serv-ices are critically important to a vibrant and open arts community. They play an important role by allowing artists to function as active individuals, charting their own courses and defining their production and presentation functions. Fiscal sponsorship services are also important to new and developing ensembles of artists and collaborating artists. Fiscal sponsorship provides grantmakers a way to support artists while recognizing that it is not wise for every artistic idea to result in a nonprofit arts organization.
It is essential that a sponsored artistic project unfold under the supervision of the nonprofit organization that receives the grant, and that the sponsor have control over the decision of whether or not to sponsor the individual artist. This rule applies regardless of whether or not the name of the individual was first proposed by the private foundation, as long as there is an objective manifestation of the grantee organization's control.
For example, an individual choreographer contacts the Jerome Foundation requesting support to produce a concert of new work. She does not have her own tax-exempt nonprofit dance company. The Jerome Foundation explains that it has no program that awards grants directly to choreographers for this purpose. However, the Foundation is open to a request from a fiscal sponsor on her behalf. The choreographer then goes to the marketplace of nonprofit arts organizations willing to provide that service, applies to one or more for sponsorship, and then applies to the Foundation via the sponsoring organization. In most instances the choreographer writes the proposal and constructs the budget. It is reviewed by the fiscal sponsor and then submitted to the Foundation.
A foundation may not contact a nonprofit organization and instruct it to apply to the foundation on behalf of a specific individual. Often, choreographers ask foundation staff to recommend a fiscal agent. Jerome staff follows a strict rule: never recommend one fiscal sponsor. This is too prescriptive and may be interpreted as overt foundation control. Staff takes care to mention several organizational options and encourages potential applicants to research broadly.
The IRS provides some latitude in its fiscal sponsor regulations. The important point is that the grantee organization has the right to examine the qualifications of an individual artist and come to its own decision about whether or not it wishes to provide fiscal sponsor support. Some people have suggested that this authority on the part of the grantee organization means it could substitute another artist for the one the foundation wants to support, or could dismiss a particular artist the foundation chose to support and retain the funds for another person. This doesn't worry me. A foundation, via its grant contract, can achieve adequate assurance that the foundation's grant will be spent for the purpose it wishes to support.
For its part, the grantee organization has to provide sufficient supervision over the individual's performance and use of funds. The required level of additional work and responsibility is the main reason that many nonprofits do not offer fiscal sponsor services. Fiscal sponsorship agreements might specify phased payments to the artist or ensemble, and regular reports. In many instances, fiscal sponsors offer professional development opportunities to artists, such as technical assistance in budgeting and fundraising, and they have experienced staff members who provide counsel and coaching. In the many years that the Jerome Foundation has supported fiscal sponsor requests, it has had very, very few problems. These grants are usually modest in size and often are used immediately by the recipients to produce new work.
Grants that Require Expenditure Responsibility
If foundations are willing to exercise “expenditure responsibility” they may be able to support the activities of entities that do not have nonprofit 501(c)(3) status. The IRS outlines in great detail what types of grants require foundations to exercise this extra level of responsibility. Arts grantmakers may come across opportunities to support ensembles, small groups of artists, artist collaborators, and start-up organizations founded by artists. There may be good reasons why they are not pursuing nonprofit status. It may be too early. It may be a single project or a time-specific initiative. It may be the nature of a particular type of arts entity.
Examples may be helpful here. An independent press, a for-profit entity, may have a mission and history of publication choices that favor writers whose works are unlikely to be commercially successful, and whose publications are of high artistic quality. Often, these are founded by exceptionally knowledgeable and committed editors who establish their presses as small businesses. A foundation might wish to make a grant to such a press for particular publications by writers in its region. The foundation may make a grant to that press if it exercises expenditure responsibility.
Another example: An experimental theater ensemble applies for support of an upcoming production but does not have nonprofit status. It may be too early in the ensemble's life. It may be a conscious choice not to add the administration required of a nonprofit until the group of artists has better sense of its future. The foundation may make the grant. However, in doing so, the foundation bears the burden of exercising expenditure responsibility.
To exercise expenditure responsibility, a foundation must exert all reasonable efforts and establish adequate procedures to insure that the grant is spent only for the purpose for which it is made, to secure complete reports from the grantee on how the funds are spent, and to make reports to the IRS on the foundation's annual tax return describing its supervision of the expenditures. The foundation has an obligation to conduct full research on such proposals, taking the same care and diligence that it would apply to a request from a nonprofit organization. In most cases, foundations exercising expenditure responsibility take extra steps for even greater due diligence in their research of such proposals.
The inquiry foundations are required to conduct has to be complete enough to give a reasonable person assurance that the grantee will use the grant for the proper purpose. The IRS gives examples such as investigating the prior history and track record of the entity and its managers/directors, research into the activities of that entity, and an assessment of its financial position so that a funder can be assured that dollars received will be used for nonprofit purposes. It's important that the recipient sign a contract that insures that the monies will be used for the purposes proposed and that any dollars not used be repaid to the foundation. The recipient also needs to confirm that all financial records will be kept open and available to the foundation at reasonable times.
In the case of an independent for-profit press or an experimental ensemble founded by an artist, this level of due diligence may very well involve reviewing the tax return of the individual or business. Privacy issues arise. Exercising prudent expenditure responsibility is not necessarily onerous, but it must be taken seriously. In the few instances in which Jerome Foundation has used this tool, it has held itself to a high standard of research, review, and monitoring in order to be prepared for any questions from the IRS.
Some foundations use the expenditure responsibility provisions to make program-related investments consistent with their purposes. These have included investments in small business development in a region, such as seeding for-profit craft cooperatives in rural areas.
A foundation choosing to make expenditure responsibility grants must provide, on its annual tax return, basic information such as the name and address of the grantee, the date and amount of the grant, the purpose of the grant, the amounts expended by the grantee based upon reports received, any indication whether monies have been diverted, the dates of reports received from the grantee, and a record of the foundation's review of these reports and verification of them. The foundation is required to make certain that reports and information are on file for such grants and available to the IRS if an audit is conducted. The foundation will be penalized if it does not follow proper procedures. However, if the foundation acts in good faith and exercises all responsible controls and the grantee still diverts funds, the foundation will not be penalized. It must withhold future payments until reports are regularly received, and it must make reasonable efforts to obtain the required reports. For example, the Jerome Foundation records exactly how many times it has written a grantee for a report; whether the grantee has been contacted by post, email, or telephone; the dates of all such requests; dates of responses received; dates of reports submitted; certification of review of those reports and whether or not additional information is required; and, in some cases, copies of cancelled checks documenting the grant expenditures.
Grant Contracts with Nonprofit Organizations that Regrant to Individuals
Foundations are allowed to work with a nonprofit arts organization to define a program of assistance to individuals. For example, Jerome Foundation has negotiated grant contracts with the American Composers Forum and Dance Theater Workshop to support commissioning programs that these two nonprofit organizations operate. The specific purpose of these programs is to support individual artists.
Key attributes of this tool for supporting individual artists are:
- The foundation is allowed a role in defining how the program will work and how the selection process is structured.
- The arts organization submits a proposal to the foundation.
- The foundation does not exercise control over which individuals receive support from that regrant fund.
- The foundation achieves its purpose in concert with an arts nonprofit that shares its commitment to supporting individuals.
In these cases, the individual artists receiving support may derive great benefit from the arts organization operating the regrant program. They may receive services such as employment through teaching, career coaching, professional development, and administrative support. Many foundations prefer this strategy over establishing and operating their own individual grants program. There are solid arguments to be made for both; and they may vary by arts discipline.
Foundations may also use this tool to support incubator programs in which individual artists, developing ensembles, and organizational start-ups occupy a cooperative space and use co-op services. Seeding this kind of activity via a collective nonprofit that manages the incubator is a way of supporting individual initiative.
This article is an encouragement to devise ways to support individual artists, and to experiment with several. There are many tools that grantmakers may use. My own perception is that a box of tools is better than one. Artists prefer having multiple ways to gain access to foundation support; and communities are the better for it. Using multiple strategies diversifies and broadens the impact of a foundation's work because each strategy supports different selection criteria and processes. Good legal counsel and responsible administrative controls, paired with committed arts staff, make these strategies possible and effective.
In 2005, the Foundation is celebrating the 100th anniversary of the birth of its founder, Jerome Hill, through programs in France, New York, and Minneapolis and Saint Paul. For more information, go to www.jeromefdn.org.