IRS approves a private foundation's scholarship procedures

Plain-English summary

A private operating foundation proposed one-time scholarships for undergraduate and graduate students who belonged to the organization. It publicized the program, excluded insiders and prior recipients, used coded applications and essay scoring, and paid awards directly to schools for tuition, books, and fees. The IRS approved the selection procedures as objective and nondiscriminatory under section 4945(g)(1), so grants made under those procedures would not be taxable expenditures. The letter also said recipients would not be taxed on awards used for qualified tuition and related expenses, subject to section 117(b). The approval applies only while later programs use standards and procedures that do not differ significantly from those described.

Ruling snapshot

• Question: Do the foundation's procedures qualify for advance approval of its scholarship grants under section 4945(g)?
• Outcome: approved, subject to the program and operating conditions in the letter
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g); Treas. Reg. § 53.4949-4(c)(1)

Full text (IRS public release)

Transcriber's note: this document is a scan. Obvious OCR errors in the heading, legend, 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: 202005026 Employer Identification Number:
Release Date: 1/31/2020

Contact person - ID number:
Date: November 4, 2019

Contact telephone number:

LEGEND:

e dollars = amount
b dollars = amount

c dollars = amount

d dollars = amount

f = number

X = organization

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 operating 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

You will provide scholarships to students to defray the costs of attending post-secondary
schools as either undergraduate or graduate student. The number of scholarships to be
made annually is determined based on the funds available including the earnings of your
investment assets.

The amount of each scholarship is determined by your Board of Directors with the
intention of providing sufficient awards to assist the recipients with school expenses; but

Letter 4792 (10-2012)
Catalog Number 58263T


also to allow for awarding multiple scholarships each year. Scholarships are awarded on
a one-time bases for each recipient and are not available for renewal.

You currently award f scholarships to undergraduate students.       for b dollars,
      for c dollars,       for d dollars and       for e dollars. You also award       scholarship for
post-graduate study.

The scholarship program is publicized on your website and announcements are in all
branch locations. The scholarship application form is available on your website when
applications are being accepted.

All students who are members of X are eligible for scholarships with the exception of the
following individuals: members of X’s Board of Directors, X’s officers, X's employee,
member of the scholarship selection committee, or family member of any such person, or
previous X scholarship recipients.

Students are required to submit a two-part essay describing their intended course of
study, what influenced their choice, and also what they feel needs to be done to increase
financial literacy for students. When applications are received, they are assigned a code
to ensure an unbiased review of the application. They are then distributed to selection
committee members for review. Each reviewer grades the application for content,
grammar and style. The total scores received for all applications are compared and the
ones receiving the highest grades are awarded the scholarships. The selection
committee is made up of employees of the X who volunteer to review the application.
New volunteers are recruited every year.

Students are only eligible to receive a scholarship one time. Once the students have
started at their respective schools, the scholarship funds are delivered by you to the
schools’ Financial Aid Offices for payment of tuition, books, and fees. Because there are
no repeat awards and the Financial Aid Offices manage the use of funds, no follow-up
reporting is required from the recipients. If a student leaves school during the term, the
schools return any remaining scholarship funds.

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

To receive approval of its educational grant procedures, Treasury Regulation Section
53.4949-4(c)(1) requires that a private foundation show:

• The grant procedure includes an objective and nondiscriminatory selection
process.

• The grant procedure results in the recipients performing the activities the
grants were intended to finance.

• The foundation plans to obtain reports to determine whether the recipients
have performed the activities that the grants were intended to finance.

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. The effective
date of our approval is December 27,       , which is the date your request was
submitted.

• 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.

We've sent a copy of this letter to your representative as indicated in your power of
attorney.

Letter 4792 (10-2012)
Catalog Number 58263T


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