IRS approves a private foundation's scholarship-grant procedures under § 4945(g)

Plain-English summary

A private foundation asked the IRS to approve, in advance, the procedures it uses to award college scholarships. Private foundations normally owe an excise tax on grants to individuals for study, but § 4945(g) exempts a grant if the IRS pre-approves an objective, nondiscriminatory selection process. The foundation runs a scholarship for graduating seniors who served as mentors in an afterschool program for at-risk youth, selecting one student a year based on academics, financial need, and a written application, with the money paid directly to the college and continued eligibility tied to keeping a 3.0 average. The IRS approved the procedures, so payments made under them are not taxable expenditures and the scholarships are tax-free to recipients (up to the § 117 limits) when spent on qualified tuition and related expenses. The approval carries the usual conditions: it covers only this program, cannot go to the foundation's own insiders or their relatives, and requires the foundation to keep records and follow up on how the money is used.

Ruling snapshot

• Question: Do the foundation's scholarship-award procedures qualify for advance approval under § 4945(g), so that the grants are not taxable expenditures?
• Outcome: Approved
• Key authorities: IRC § 4945(g)(1); IRC § 117(a)-(b); IRC § 170(b)(1)(A)(ii); IRC § 170(c)(2)(B)

Full text (IRS public release)

Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Department of the Treasury

Employer Identification Number: [redacted]
Contact person - ID number: [redacted]
Contact telephone number: [redacted]

Date: March 12, 2019

Number: 201923028
Release Date: 6/7/2019

UIL: 4945.04-04

LEGEND
X = Scholarship
Y = Program
Z = School System

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. 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 provide in Code Section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program called X. The purpose of X is
to provide scholarships to graduating seniors who have participated in Y as a mentor. Y
is an afterschool mentoring program for at-risk youth.

The criteria you use to select recipients includes academic performance, financial need,
and participation in Y conducted at Z, the local school system. Currently you will select
one student per year that has participated in Y.

Letter 4792 (10-2012)
Catalog Number 58263T

The scholarship is meant to cover tuition, fees, books, and standard room and board
towards either a two- or four-year college degree after all other sources of financial aid
and scholarships have been exhausted.

Scholarship administration is handled directly through your administrative offices and
tuition payments are made directly to the school billing office. Scholars are required to
disclose final grades at the end of every semester to determine continued eligibility.
Scholarship recipients must maintain a 3.0 average every semester during the
scholarship coverage period. Each semester is evaluated individually before determining
future eligibility.

The selection committee consists of a guidance counselor from the Z high school,
selected teachers, and other Z high school staff members who have prolonged exposure
to the student applicants. The committee passes two to four recommendations to your
board based on academic performance, financial need, and personal characteristics.
Your board then makes the final selection based on the recommendation and the content
of the application essays.

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 the grantee are used for their intended purposes, and 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 maintain all records related to the following: (1) individual
grants including information to evaluate grantees, (2) grantees which are identified as a
disqualified person, (3) how the amount and purpose of each grant was established, and
(4) how you established supervision and investigation of the 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).

Letter 4792 (10-2012)
Catalog Number 58263T

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