Foundation's band-scholarship procedures approved under 4945(g)(1)

Plain-English summary

A private foundation runs a scholarship for graduating senior band members at a particular school and asked the IRS to approve how it picks winners. Private foundations owe an excise tax on grants to individuals for study unless the IRS pre-approves the selection procedure under IRC Section 4945(g). The foundation described a merit-based, single non-renewable award judged by its trustees on band participation, grades, and an essay, with children of trustees excluded and money paid directly to the recipient's college. The IRS found the procedures meet Section 4945(g)(1), so the grants are not taxable expenditures, and the awards qualify as tax-free scholarships to recipients used for qualified tuition under Section 117(b). The upshot: the foundation can fund the scholarship without triggering the 4945 tax as long as it runs the program as described.

Ruling snapshot

• Question: Do the foundation's scholarship grant procedures qualify for advance approval under IRC § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC § 4945(g); IRC §§ 117(a), 117(b), 170(b)(1)(A)(ii), 170(c)(2)(B)

Full text (IRS public release)

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

Number: 201835016 Employer Identification Number:

Release Date: 8/31/2018
Contact person - ID number:

Contact telephone number:
Date: June 6, 2018

LEGEND UIL: 4945.04-04

Y = Name
m dollars = Amount

Dear

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

Also, 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 scholarship program.

The purpose of your scholarship program is to provide an annual non-renewable
scholarship for m dollars for post-secondary education to a graduating student band
member of Y. This scholarship is based on band participation and academic merit, and is
not a financial aid scholarship.

Your scholarship is announced to the band students at Y and applications are provided to
all graduating senior band students.

To be eligible to apply, students must be senior band members at Y who are currently
taking at least one band class and maintaining at least a B average in that class. The
applicants must regularly participate in band activities including after-school rehearsals,
performances, auditions, assessments, etc. The applicants are not required to declare a
music-related major for eligibility.

All applicants must submit a completed application form by a specific date with all
requested documentation. This includes at least one letter of recommendation from a
school source (teacher, counselor, administrator, etc.) and a letter of acceptance or
comparable documentation to demonstrate their intent to attend an institution of higher
learning. All applicants must also explain how music influences their lives.

All applications will be reviewed and scored by your selection committee consisting of
your Trustees. Senior band students whose parents are Trustees are not eligible for this
scholarship. The selection committee will consider the applicants' band participation,
their academic records, and their essays. In addition, the selection committee may
consider the neatness and readability, spelling, grammar and punctuation of the
applications in selecting the recipient.

The recipient will be announced at graduation and the scholarship money will be paid
directly to the student account at their institution of higher learning.

You represent 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, (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 diversions from
occurring.

You represent that you will: (1) maintain 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 purposes of each grant, and (4) establish that you
undertook the supervision and investigation of grants described above.

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 the provisions of Code Section
117(a).
• The grant is to be used for study at an educational organization described in Code
Section 170(b)(1)(A)(ii).

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.

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

Letter 4792 (10-2012)
Catalog Number 58263T