Scholarship and support grants for disadvantaged women receive approval

Plain-English summary

A private foundation proposed grants to help academically successful but financially disadvantaged women from a redacted country attend educational institutions in the United States. The program would cover scholarships for formal study as well as living, medical, and other educational support expenses. A board selection committee would consider financial need, academic history, English proficiency, and recommendations, while the foundation would confirm enrollment and good standing. Payments would go directly to educational institutions or reimburse people who paid documented expenses, not directly to recipients. The foundation would monitor grades and test scores, terminate grants for poor performance, investigate diverted funds, and maintain detailed records. The IRS approved the procedures under Sections 4945(g)(1) and 4945(g)(3), and stated that qualifying scholarship amounts used for tuition and related expenses would not be taxable to recipients under Section 117(b).

Ruling snapshot

• Question: Did the foundation's combined scholarship and educational-support grant procedures qualify for advance approval?
• Outcome: Approved.
• Key authorities: IRC §§ 74(b), 117(a), 117(b), 170(b)(1)(A)(ii), 170(c)(2)(B), and 4945(g); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Number: 201825033
Release Date: 6/22/2018

Employer Identification Number:

Contact person - ID number:

Contact telephone number:

Date: March 21, 2018

LEGEND UIL: 4945.04-04

T = Name
U = Country

V = School Name

Dear [redacted]:

You asked for advance approval of your scholarship grant procedures under
Internal Revenue Code Section 4945(g). This approval is required because you are
a private foundation that is exempt from federal income tax. You requested
approval of your scholarship program to fund the education of certain qualifying
students.

Our determination

We approved your procedures for awarding scholarships and educational grants.
Based on the information you submitted, and assuming you will conduct your
program as proposed, we determined that your procedures for awarding
scholarships and educational grants meet the requirements of Code Sections
4945(g)(1) and 4945(g)(3). As a result, expenditures you make under these
procedures won't be taxable.

Also, Section 4945(g)(1) awards made under these procedures are scholarship or
fellowship grants and are not taxable to the recipients if they use them for qualified tuition
and related expenses (subject to the limitations provided in Code Section 117(b)).

Description of your request

Your letter indicates you will operate a grantmaking program called T. The purpose of T
is to provide financial support to allow disadvantaged women from U who have a history
of academic excellence in high school and/or college, and a proven desire to do well. T
will fund expenses related to attending an educational institution in the United States.
Under T, you will make distributions which have components of both Sections 4945(g)(1)
and 4945(g)(3). Examples of distributions under Section 4945(g)(1) are scholarships for
recipients to attend a qualified educational institution to pursue a formal course of study.
Examples of distributions under Section 4945(g)(3) are living expenses, medical
expenses and other expenses not funded by scholarships.

As part of T, you will work with V, a school in U who has a history of preparing students
from U to attend high school or college in the United States. You will provide promotional
materials to V who will distribute them. Moreover, you will publicize T through the internet
and in the future other institutions.

You will base the number of grants upon your available funds and the number of
applicants. The amount of each grant depends on the educational costs, the tuition
reduction or grant allowed by the educational institution where the recipient is attending,
and any other available funding available to the recipient. Grants are not renewable but
all recipients are encouraged to reapply.

To be eligible for T, applicants must be females from U who meet English proficiency
standards to attend school in the United States and who do not have funds for such study
from their own or their family's resources. Applicants will most likely already be in the
United States attending school because of resources provided by V. Applicants must also
have a host family to be eligible. In addition, eligible recipients will be required to attend a
certified school, to be subject to the school's opinion that the eligible recipient will benefit
from the educational opportunities that the school provides. Eligible candidates must
complete an application and provide supporting documentation directly to you. You will
generally then confirm the information provided by the applicant with the educational
institution where they are attending or plan to attend. A selection committee made up of
your board will select the recipients. The criteria for board membership is a genuine
interest in furthering the education of women from U.

Your selection committee will choose recipients based upon their inability to pay, the
strength of their academic history, their proficiency in English, the recommendations from
a current or prior academic advisor, and other relevant criteria. No funds are paid directly
to the recipients. Before payment is made, you will also confirm that the recipient is
enrolled at the educational institution and is in good standing.

No funds will be paid directly to the recipients. Tuition, room and board and other funds
necessary to attend the educational institution will be paid directly to the educational
institution. Furthermore, there are individuals/donors who will pay certain expenses on
behalf of the recipients, for example medical bills, and upon providing invoices or receipts
to you, you will reimburse such individuals. You also will not coordinate or provide
students assistance in obtaining visas or travel to and from the United States. The
schools the students will attend will provide visa assistance through their international
program coordinators.

You will review recipients’ grades and test scores as well as communicate with the
academic office of the educational institution attended by the recipient to insure the
recipient is meeting the terms of the grant. If the eligible recipient is performing poorly or
contrary to the expectations of the educational institution, the grant will be terminated.

You represent that you will maintain the following: (1) all records relating to individual
grants including information obtained to evaluate grantees, (2) identify whether a grantee
is a disqualified person, (3) establish the amount and purpose of each grant, and (4)
establish that you undertook the supervision and investigation of grants described above.

You represent that you will complete the following: (1) arrange to receive and review
grantee reports annually and upon completion of the purpose for which the grant was
awarded, (2) investigate diversion of funds from their intended purposes, and (3) take all
reasonable and appropriate steps to recover the diverted funds, ensure other grant funds
held by a grantee are used for their intended purposes, and (4) withhold further payments
to grantees until you obtain grantees’ assurances that future diversions will not occur and
that grantees will take extraordinary precautions to prevent future diversion from
occurring.

You will check the OFAC List of Specially Designated Nationals and Blocked Persons for
names of individuals and entities with whom you are dealing to determine if they are
included on the list. You will comply with all statutes, executive orders, and regulations
that restrict or prohibit persons from engaging in transactions and dealings with
designated countries, entities, or individuals, or otherwise engaging in activities in
violation of economic sanctions administered by OFAC. If necessary, you will acquire
from OFAC the appropriate license and registration where necessary.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(Code Section 4945). A taxable expenditure is any amount a private foundation pays as a
grant to an individual for travel, study, or other similar purposes. However, a grant that
meets all of the following requirements of Code Section 4945(g) is not a taxable
expenditure.

• The foundation awards the grant on an objective and nondiscriminatory basis.
• The IRS approves in advance the procedure for awarding the grant.

• The grant is:

• A scholarship or fellowship subject to Section 117(a) and is to be used for
  study at an educational organization described in Section 170(b)(1)(A)(ii); or

• A prize or award subject to the provisions of Section 74(b), if the recipient of
  the prize or award is selected from the general public; or

• To achieve a specific objective; produce a report or similar product; or
  improve or enhance a literary, artistic, musical, scientific, teaching, or other
  similar skill or talent of the recipient.

Under 4945(g)(3), to receive approval of its educational grant procedures, Treasury
Regulations Section 53.4945-4(c)(1) requires that a private foundation show:

• The grant procedure includes an objective and nondiscriminatory selection
  process.

• The grant procedure results in the recipients performing the activities the grants
  were intended to finance.

• The foundation plans to obtain reports to determine whether the recipients have
  performed the activities that the grants were intended to finance.

Other conditions that apply to this determination

• This determination only covers the grant program described above. This approval
  will apply to succeeding grant programs only if their standards and procedures
  don’t differ significantly from those described in your original request.

• This determination applies only to you. It may not be cited as a precedent.

• You cannot rely on the conclusions in this letter if the facts you provided have
  changed substantially. You must report any significant changes to your program to
  the Cincinnati Office of Exempt Organizations at:

Internal Revenue Service

Exempt Organizations Determinations
P.O. Box 2508

Cincinnati, OH 45201

• You cannot award grants to your creators, officers, directors, trustees, foundation
  managers, or members of selection committees or their relatives.

• All funds distributed to individuals must be made on a charitable basis and further
  the purposes of your organization. You cannot award grants for a purpose that is
  inconsistent with Code Section 170(c)(2)(B).

• You should keep adequate records and case histories so that you can substantiate
  your grant distributions with the IRS if necessary.

We’ve sent a copy of this letter to your representative as indicated in your power of
attorney.

Please keep a copy of this letter in your records.

If you have questions, please contact the person listed at the top of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements