IRS pre-approves a private foundation's scholarship program, so the grants are not taxable expenditures

Plain-English summary

Private foundations normally owe a penalty excise tax when they hand money to individuals for study or similar purposes, unless the IRS approves the grant-making procedures in advance. Here a private foundation set up a scholarship program to help high school graduates from a particular area pay for undergraduate education, and it asked the IRS to bless its selection and oversight procedures under Internal Revenue Code § 4945(g). The IRS approved. Because the procedures award scholarships on an objective, nondiscriminatory basis, exclude insiders and their relatives, use a partner public charity to help administer and select recipients, and include recordkeeping and follow-up on misused funds, the grants qualify as scholarships under § 4945(g)(1) and are not "taxable expenditures" that would trigger tax on the foundation. The letter also notes the awards are tax-free to the students if used for qualified tuition and related expenses under § 117. The approval covers this program (and similar future ones) as long as the foundation runs it as described and does not make grants to disqualified insiders. This is routine advance approval that lets a foundation fund scholarships without penalty.

Ruling snapshot

• Question: Do the foundation's scholarship-award procedures qualify for advance approval under § 4945(g)(1), so the grants are not taxable expenditures?
• Outcome: Approved
• Key authorities: IRC §§ 4945(g)(1), 4945; 117(a)-(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

Release Number: 201844014
Release Date: 11/2/2018 Employer Identification Number:

Date: August 9, 2018
Contact person - ID number:

Contact telephone number:

Legend UIL: 4945.04-04
B = Name

C = Organization

D = Number

x 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 that you will operate an educational grant program. The purpose of
your program is to assist high school graduates in B who plan to continue their education
at an accredited institution of the recipient's choice. Awards are only for undergraduate
studies. Your investment income and required minimum payout distribution will likely
determine the anticipated number of scholarships you will annually award and currently
you plan to award up to D scholarships per year in the range of x dollars.

Letter 4792 (10-2012)
Catalog Number 58263T

Furthermore, you plan to award two types of scholarships. The first type will help pay the
recipient's tuition as well as room, board, books, and/or other necessary expenses of
attending an accredited educational institution. The second type of scholarship will only
pay for tuition.

To administer and manage your program, you plan to enter into an agreement with C, a
Section 501(c)(3) charitable organization and a public charity who will create an
application for your scholarship program and assist with marketing efforts to publicize
your scholarship program. In addition, you plan to establish an Advisory Board of
Trustees, who has members from B, who will assist in promoting your program.

You will also publicize your program by contacting the guidance counselors for each
school in B to inform them about your program. You will also send representatives to
college fairs and similar events to publicize your scholarship program as well as post
detailed listings for your program on relevant websites on the internet.

To be eligible to receive a scholarship, an applicant must be a current high school senior
who has graduated from a high school within the last five years from B or has received a
home school diploma within the last five years while living in B. In addition, an applicant
must plan to enroll in undergraduate study at an accredited two-year or four-year college
or university, or a vocational-technical school in the United States for the entire upcoming
academic year or be a current postsecondary undergraduate at such an institution. An
applicant must also have a minimum high school grade point average of 2.5 on a 4.0
scale (or its equivalent).

The following persons are not eligible to receive a scholarship:

• A member of your Advisory Board of Trustees,

• A spouse of a Trustee or of a member of your Advisory Board of Trustees,

• Any lineal descendants of a Trustee or of a member of your Advisory Board of
Trustees,

• The spouse of any lineal descendant of a Trustee or of a member of your Advisory
Board of Trustees, or

• Any employee, officer or director of any corporate Trustee or its affiliates or
subsidiaries or any spouse or lineal descendant of such persons.

You will use C or a similar organization to select the scholarship recipients through a
combination of criteria you have established, although your trustee has the ultimate
authority regarding the selection of the scholarship recipients. These criteria include
financial need, academic performance, demonstrated leadership and participation in
school and community activities, work experience, unusual personal or family
circumstances and character. You may also require a written essay as part of the
application which will describe the student's plans, which will be reviewed as part of the
selection process.

Letter 4792 (10-2012) ,
Catalog Number 58263T

Awards will be renewable for up to a total of four years of scholarship payments or until a
bachelor's degree is earned, whichever occurs first. To be renewable, a student must
remain in good standing at his or her institution and maintain a minimum grade point
average of 2.75 on a 4.0 scale.

Awards will generally be paid directly to the educational institutions. Any scholarship
amounts that are not payable directly to an institution will require reporting by the
recipient who will provide you or C with reports.

You represent that you will (1) investigate any indication of a scholarship grant not being
used in furtherance of the grant's purposes, (2) withhold payments, to the extent
possible, while conducting your investigation, (3) take all reasonable and appropriate
steps to recover funds or ensure restoration of diverted funds not used in furtherance of
grant purposes, and (4) withhold further payments for recipients until you receive
assurances that future diversions shall not occur as well as the precautions taken to
prevent future diversions.

You represent that you will maintain all records related to (1) information obtained to
evaluate grantees, (2) the identification of grantees, including names and addresses of
recipients and any relationship of any recipient to you sufficient to make them a
disqualified person, (3) the purpose and amount of each grant, and (4) any additional
information you obtain in complying with your grant administrative procedures. You will
maintain information pertaining to both successful and unsuccessful applicants.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

• 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

Letter 4792 (10-2012)
Catalog Number 58263T