IRS approves public-service fellowship procedures

Plain-English summary

A private foundation proposed a fellowship for university students committed to public service. Rather than cash, selected fellows would receive lodging, counseling, and supplemental liberal-arts education for one year, potentially renewable for a second year. Applicants would be evaluated on academic achievement, personal qualities, public-service commitment, financial need, and family background; directors’ and selection-committee members’ families were excluded. The IRS approved the procedures under section 4945(g)(3), so expenditures made under the program as described would not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation’s procedures for selecting and supervising public-service fellows qualify for advance approval under section 4945(g)(3)?
• Outcome: approved
• Key authorities: IRC §§ 74(b), 117(a), 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g)(3); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

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

Number: 202011014 Employer Identification Number:
Release Date: 3/13/2020
Contact person - ID number:
Date: December 18, 2019
Contact telephone number:

Legend: UIL:
T= religion 4945.04-04
V= fellowship 1
W= fellowship 2
X= fellowship 3
Y= university

Dear

You asked for advance approval of your educational fellowship procedures under Internal
Revenue Code Section 4945(g)(3). This approval is required because you are a private
foundation that is exempt from federal income tax.

Our determination
We approved your procedures for awarding educational fellowships. Based on the
information you submitted, and assuming you will conduct your program as proposed, we
determined that your procedures for awarding educational fellowships meet the
requirements of Code Section 4945(g)(3). As a result, expenditures you make under
these procedures won't be taxable.

Description of your request
You will operate an educational fellowship program called X to provide support to
students of Y who are committed to public service.

The purpose of X is to provide a supportive living environment for up to college
students that will facilitate their studies and personal growth. No funds will be provided
through the program, instead, you will provide comprehensive experience including
lodging, counseling and supplemental liberal arts educations to selected Fellows for one
year, with a possible extension of a second year.

You will coordinate with other organizations that promote your values such as
educational nonprofits and T , to publicize X, and your Officers and Directors will
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publicize X through their personal networks. In addition, you expect public awareness of
X will increase through word of mouth.

You indicated that there are two different applications for X, which are V and W, used to
get two different categories of applicants for the same fellowship program.

These applications are advertised by running awareness events around T community
centers across the United states, using scholarship websites, executing email campaigns
for high school and college counselors in major concentration of T population in the
United States, send emails with literature and application deadline to organizers of T
community to create interest in X. You will also run informational sessions as high
schools, T , and application campaigns in coordination with local teams to collect
academic and demographic information including GPA, class rankings, extra -curricular
activities, and financial needs.

To be eligible for X, the candidate must have a GPA of 3.5 for high school and 3.75 for
any college classes, submit a complete application and personal statement and
participate in a personal interview with the Selection Committee. The Selection
Committee will evaluate the candidate's personal qualities, interests and goals, including
extracurricular activities, community service, financial need and family background. The
Selection Committee will select candidates who have a distinguished academic
background and a demonstrated commitment to public service. In addition to the above
listed eligibility requirements, to have the Fellowship extended for a second year, the
fellow must remain in good standing at Y or the applicable university, must satisfactorily
pass two oral exams that assess the student's retention of supplementary liberal arts
curriculum, and must adhere to all the rules of behavior required of fellows.

The Selection Committee are executives and entrepreneurs in the field of technology and
are actively invested in supporting youth in obtaining quality education. Members of the
Selection Committee are appointed by your Board of Directors.

Family members of your Board of Directors and persons serving on the Selection
Committee are not eligible to be considered for X.

Program costs, including the costs of counselors and instructors, room and board are
paid for directly by you. The counselors and instructors report regularly to you on the
fellow's retention of educational material provided through X.

In the event a fellow is not compliant with the requirements of X, you will remove the
fellow from X.

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

                                                                   Letter 4779 (10-2012)
                                                                   Catalog Number 58222Y

3

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 Section 117(a) and is to be used for
study at an educational organization described in Section 170(b)(1)(A)(ii); or
- A prize or award subject to the provisions of Section 74(b), if the recipient of
the prize or award is selected from the general public; or
- To achieve a specific objective; produce a report or similar product; or
improve or enhance a literary, artistic, musical, scientific, teaching, or other
similar skill or talent of the recipient.

To receive approval of its educational grant procedures, Treasury Regulations Section
53.4945-4(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 covers only the fellowship program described above. This
approval will apply to succeeding fellowship 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 precedent.

• You cannot rely on the conclusions in this letter if the facts you provided have
changed substantially. You must report any significant changes in 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 make fellowships to your creators, officers, directors, trustees,
foundation managers, or members of selection committees or their relatives.

                                                                        Letter 4779 (10-2012)
                                                                        Catalog Number 58222Y

4

• All funds distributed to individuals must be made on a charitable basis and must
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 fellowship 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 any questions, please contact the person listed at the top of this letter.

                                      Sincerely,




                                      Stephen A. Martin
                                      Director, Exempt Organizations
                                      Rulings and Agreements




                                                                    Letter 4779 (10-2012)
                                                                    Catalog Number 58222Y

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