Foundation's primary-care provider scholarship procedures approved under 4945(g)

Plain-English summary

A private foundation received advance IRS approval of its scholarship grant procedures under Code Section 4945(g), which lets a foundation avoid the Section 4945 excise tax on grants to individuals when the IRS blesses the selection process in advance. The foundation's program (X in the legend) supports the development of primary-care providers in its state by awarding two scholarships to students entering their first semester of a clinical specialty program who intend to practice primary care in specified regions. Eligible schools each nominate one candidate; nominees must meet residency, community-connection, academic, financial-need, leadership, and clinical-experience criteria, and an independent selection committee interviews and ranks them, awarding the top two nominees. Schools whose nominees are not selected receive a one-time stipend toward their nominee's tuition, and payments are staged across the recipient's enrollment and stop if the recipient leaves the nominating school. The foundation committed to keeping complete records and to the standard steps for withholding, recovering, and preventing diversion of grant funds. Finding the procedures objective and nondiscriminatory and the awards used for study at qualified institutions, the IRS approved them under Section 4945(g)(1), so the grants are not taxable expenditures and are tax-free scholarships under Section 117 when used for qualified expenses. The approval applies only to this foundation.

Ruling snapshot

• Question: Do the private foundation's scholarship grant procedures qualify for advance approval under Code Section 4945(g)(1) so the awards are not taxable expenditures?
• Outcome: approved (procedures meet § 4945(g)(1); grants are not taxable expenditures and are excludable scholarships/fellowships under § 117(a) if used for qualified expenses)
• Key authorities: IRC §§ 4945(g)(1), 117(a)-(b), 170(b)(1)(A)(ii), 170(c)(2)(B)

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR. OCR bullet markers rendered "e" were restored to bullets where used; wording is otherwise verbatim, and redacted legend placeholders appear as the IRS released them.

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

Number: 201911012 Employer Identification Number:

Release Date: 3/15/2019
Contact person - ID number:

Contact telephone number:
Date: December 20, 2018

LEGEND UIL: 4945.04-04

X= Name

Y= Specialists
U= Region
V= Region

Z= Specialty

b dollars= Amount
c= Number
d= Number
e= Number
f 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 called X.

Letter 4792 (10-2012)
Catalog Number 58263T

Your purpose is to improve the quality of life through investments in healthcare by
providing support to the development of primary care providers in your state.

The purpose of X is to support the growth and development of Y by awarding two
scholarships in the amount of b dollars. Recipients must be enrolled in their first
semester of a Z program who have demonstrated:

* The potential for development into a highly capable clinical professional;
* Concern with the total welfare of the society of which he/she is an active participant;
* Intention to practice in primary care in U or V upon completion of school and training.

You will promote X to c schools with Z programs who will each be invited to nominate one
candidate for a scholarship. To be eligible to be nominated and receive a scholarship, a
candidate must:

• Reside in one of d counties in U or reside in one of e counties in V;
Show a verifiable connection to the community such as having graduated from a
high school or college there or having a familial relationship with a legal resident;

• Intend to practice primary care medicine after the completion of school. (Other
connections will be considered on a case by case basis but should be cleared by
your executive director prior to submission of the nomination. );

• Demonstrate academic performance that satisfies the minimum requirements for
the particular Z program for which they have applied;
Show financial need;
Demonstrate a capacity for leadership, communication, and humanity;

• Have at least three years of clinical practice experience before entering the Z
program.

Furthermore, candidates may only be nominated by one school.

Each of the eligible schools will complete a nomination form for their candidate which will
be e-mailed to each of the eligible schools. They will submit the form along with the
needed letters of recommendation, the candidate’s application for the program and other
required attachments by the nomination deadline. In addition, the candidate must
complete specific pages and sign the document. The nominating official must also sign
the form.

An independent selection committee consisting of persons who are leaders in their
chosen profession and civic life will review the application packets and will interview each
nominee. The committee will then rank the nominees based on how they have satisfied
the eligibility criteria. The highest-ranking nominee will be offered the first scholarship
and the next highest-ranking nominee will be offered the second scholarship. In addition,
the school whose nominee is awarded a scholarship must accept the scholarship by a
predetermined deadline. If the acceptance is not submitted by the deadline, then the
scholarship will go to the next highest-ranking nominee. Moreover, the schools whose
nominees are not selected will be awarded a one-time stipend for f dollars to be applied

Letter 4792 (10-2012)
Catalog Number 58263T

to their nominee’s tuition. If the nominee fails to follow through with enrollment, the
school gets to keep the stipend.

You will pay half of the scholarship to the recipient's school at the beginning of the
recipient’s second semester on their behalf. One fourth of the scholarship will be paid
before the beginning of the second year, and the other one fourth of the scholarship will
be paid the first business day the following calendar year. The scholarship is not
transferable to another school. If the scholarship recipient does not continue enrollment
at the nominating school, future scholarship payments will be discontinued.

You will retain complete records that will include all information you obtained to evaluate
the qualifications of the nominees. They will also contain the identification of the
nominees (including any relationship of any nominee to you, or to an officer or director of
yours); the purpose and amount of each grant; the terms of payment of each grant; and,
any additional information obtained by you as part of the application.

If you determine that all or any part of a scholarship is not being used to further the
purposes of the grant, you will take one or more of the following actions as required and
appropriate: (1) withhold payments to the extent possible during the period of
investigation; (2) take steps to recover the grant funds and/or ensure restoration of
diverted funds to the purposes of the grant; (3) withhold further payments until the
diverted funds are in fact recovered or restored; (4) obtain assurances from the
scholarship recipient and/or the school that future diversions will not occur; and (5)
require the scholarship recipient and/or the school to take extraordinary precautions to
prevent future diversions.

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.

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