IRS approves need-based scholarship procedures

Plain-English summary

A private foundation proposed scholarships for students attending primary, secondary, undergraduate, and graduate schools. It would publicize the program locally and select recipients based on financial need, written submissions, academic performance, and possible interviews, while excluding employees and other disqualified persons. Awards would be paid directly to schools, renewals would depend on continued academic achievement, and the foundation would collect transcripts, address diverted funds, and retain grant records. The IRS approved the procedures as objective and nondiscriminatory under section 4945(g)(1), so grants made under them would not be taxable expenditures. The letter superseded an earlier ruling and limits approval to programs whose standards and procedures do not differ significantly from those described.

Ruling snapshot

• Question: Do the foundation's need-based scholarship procedures qualify for advance approval under section 4945(g)?
• Outcome: approved, subject to the supervision, reporting, and recordkeeping conditions in the letter
• Key authorities: IRC §§ 117, 170, 4945, and 4946

Full text (IRS public release)

Transcriber's note: this document is a scan. Obvious OCR errors in the UIL heading, a heading artifact, bullet symbols, and redacted blank spaces were corrected by comparison with all four page images. The wording is otherwise preserved verbatim.

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

Number: 202005024 Employer Identification Number:
Release Date: 1/31/2020
Contact person - ID number:

Contact telephone number:
Date: November 4, 2019

UIL:
4945.04-04

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 provide in Code Section 117(b)).

This letter supersedes our letter dated July 3,       .

Description of your request
You will operate a program awarding grants to be used for study at educational
institutions described in IRC Section 170(b)(1)(A)(ii).

The grants described above are to be provided on an objective and nondiscriminatory
basis to individual students in order to facilitate their attendance at primary, secondary
and graduate schools, including elementary school, junior high school, high school,
college or university and graduate-level programs. Applicants will be required to
demonstrate financial need and likelihood for academic success in accordance with the
program herewith described, which is intended to be consistent with your purposes.

Letter 4792 (10-2012)
Catalog Number 58263T

Your Board of Directors will promote the opportunity to receive such grants in the local
community with goal of attracting a diverse applicant pool.

The Board will select one or more recipients based on the funds available and designated
for such grants, as determined by the Board, as well the quality of potential recipients.
Recipients will be evaluated on the basis of financial need, the content of a written
submission and prior academic performance such as grade point average and
standardized test scores. The Board may, in its discretion, conduct personal interviews to
assist with the selection process. Neither your employees nor any disqualified persons
(as that term is defined at Section 4946(a)(1) of the Code) are eligible for grants.

The terms and conditions of each grant to or for the benefit of an individual will be
contained in a letter sent to each recipient of such a grant. The recipient, or his or her
guardian, if the recipient is a minor, will be required to communicate his or her
acceptance thereof. Terms and conditions include: specific purpose of the grant, its
duration, the total amount of the grant, and requirements for narrative reports, detailing
the recipient’s academic progress, along with copies of recent grade transcripts, including
due dates for such reports.

Any renewal of a grant for any succeeding period is contingent upon evidence of
adequate performance at the time of review, such as maintenance of a minimum grade
point average, or other comparable measure of academic success under alternative
grading systems, during each semester of study. If a recipient fails to maintain the
required level of academic achievement, no further funds will be made available for such
recipient.

You will supervise the issuance of grants by implementing the following procedures:

(i) you will pay the scholarship directly to an educational institution described in
IRC Section 170(b)(1)(a)(ii)

(ii) you will require the educational institution to agree to use funds to defray the
recipient's tuition expenses only if the recipient is enrolled at such educational
institution and his or her standing at such educational institution is consistent with
the purposes and conditions of the grant, and the recipient meets the minimum
level of academic achievement set forth hereinabove.

(iii) you will require the educational institution to furnish it you with proof of the
grantee’s matriculation and copy of grade transcripts for the past academic
semester.

Notwithstanding the above, if you determine any part of the grant has been used for an
improper purpose, you will immediately take all reasonable and appropriate steps to
recover these funds or to insure the restoration of the diverted funds and the dedication
of other funds to the grantee. You will withhold any further payment to or for the benefit of
the grantee as soon as it becomes aware that a diversion may be taken place until you

Letter 4792 (10-2012)
Catalog Number 58263T

have received assurances that future diversions will not occur and will require the grantee
to take extraordinary precautions to prevent future diversions from occurring.

You will retain records pertaining to all grants made in accordance with your scholarship
program. The records include, but are not limited to, the following:

(i) All information you secure to evaluate the qualification of potential grantees;
(ii) Identification of grantees

(iii) Specification of the amount and purpose of each grant;

(iv) The follow-up information that you obtain in complying with the procedures
described herein.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

• 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