Approves a private foundation's scholarship grant procedures for students in two countries

Plain-English summary

A private foundation asked the IRS to approve, in advance, the procedures it uses
to award scholarships to students in two countries. Private foundations normally
owe an excise tax on grants to individuals for study unless the IRS pre-approves
the grant procedures under § 4945(g), so this approval is what keeps the payments
from being "taxable expenditures." The foundation described an objective,
nondiscriminatory selection process (academic ability, good character, and financial
need), scholarships paid directly to accredited schools, renewable up to four years,
with progress reports and recovery procedures for misused funds. The IRS determined
the procedures meet § 4945(g)(1), so the grants will not trigger the excise tax, and
that the awards are scholarships excludable from the recipients' income under § 117(b)
if used for qualified tuition and related expenses. The approval applies only to this
program as described and requires the foundation to avoid grants to insiders and to
keep adequate records. This is a routine but important gatekeeping ruling for any
foundation that runs a scholarship program.

Ruling snapshot

• Question: Do the foundation's scholarship-award procedures qualify for advance approval under § 4945(g)?
• Outcome: approved
• Key authorities: IRC § 4945(g)(1); IRC § 117; IRC § 170(b)(1)(A)(ii)

Full text (IRS public release)

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

Release Number: 202006013
Release Date: 2/7/2020 Employer Identification Number:
Date: November 14, 2019

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
B = Country
C = Country
D = Number

e dollars = Amount
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 provide in Code Section 117(b)).

Description of your request
Your letter indicates that you will operate a scholarship program for students in B and C,
in order to provide for tuition, books, and equipment required for educational courses.

The purpose of your program is to encourage applicants to begin and complete a
particular educational endeavor and not be limited from completing a program (or a year
of school) due to a lack of financial support.

For the foreseeable future, your scholarship program will be offered in B and C. While
operating your scholarship program in B and C, you have agreed to comply with the

Letter 4792 (10-2012)
Catalog Number 58263T

procedures required by the Office of Foreign Assets Control (OFAC). The scholarships
will be offered only at government recognized, approved or accredited schools in B and
C.

Your scholarship will be publicized in newspapers at the end of each academic year. The
number of scholarships will be dependent on the annual net income. You intend to award
D scholarships the first year. You believe there is likely to be a large pool of candidates
given the countries and schools involved, publication regarding the availability of
scholarships, and overall need for student financial assistance. The scholarships will be
awarded on an objective and non-discriminatory basis.

To be eligible for a scholarship, the student must:
• Demonstrate an academic ability and desire
• Be of good character and good citizenship, and
• Have a financial need.

Applicants must submit an application form. Applicants should include with the form any
transcripts of current grades, a written statement demonstrating financial need, a list of

scholarships or grants they are currently receiving, educational loans, career goals, and
two letters of recommendation.

One of your representatives may contact a candidate to conduct a telephone interview as
part of the final selection process. The selection committee will include one or more
members of your Board of Directors, the Principal of each of the approved schools, the
Secretary of each School Board (if available), and renowned local educationalists.

You will allocate between e dollars and f dollars per semester, which can be renewed
annually for a maximum of four years. This is for students not on academic or disciplinary
probation, and students that are making satisfactory progress toward completion of a
degree.

You will take all necessary steps to establish the proper use of your funds by various
means, including, but not limited to providing the funds for tuition and boarding directly to
the school or boarding hostel and requiring each grantee to maintain satisfactory grades
and progress at the schools.

The student will submit progress reports that will be verified with the educational
institution each semester. Upon completion of the grantees study, a final report will be
collected from the grantee.

You represent that you will (1) arrange to receive and review grantee reports annually
and upon completion of the purpose for which the grant was awarded, (2) investigate
diversions of funds from their intended purposes, and (3) take all reasonable and
appropriate steps to recover diverted funds, ensure other grant funds held by a grantee
are used for their intended purposes, and withhold further payments to grantees until you

Letter 4792 (10-2012)
Catalog Number 58263T

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 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).

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).

Letter 4792 (10-2012)
Catalog Number 58263T

• 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