IRS approves need-based scholarships for sports, arts, and education

Plain-English summary

A private foundation proposed scholarships for education and training of youth involved in soccer and other sports and for underprivileged people developing talents in the arts, education, or athletics. Financial need would be the primary selection factor, with academic success and community service also considered. A committee of directors or officers would disclose conflicts, exclude insiders and other disqualified persons, and select from a sufficiently broad applicant pool. Awards would be paid directly to institutions or programs, recipients would confirm participation, and the foundation would maintain records and investigate misuse. The IRS approved the procedures under section 4945(g)(1), so scholarships made as described would not be taxable expenditures.

Ruling snapshot

• Question: Do the proposed need-based scholarship procedures qualify for advance approval under section 4945(g)(1)?
• Outcome: approved (scholarships made under the procedures would not be taxable expenditures)
• Key authorities: IRC §§ 117(a), 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g)(1), and 4946(a); Treas. Reg. § 53.4945-4(c)

Full text (IRS public release)

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

Employer Identification Number:
Date: February 18, 2020

Contact person - ID number:
Number: 202020025

Release Date: 5/15/2020
Contact telephone number:

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)).

Description of your request

You will operate a scholarship program and provide funding for the education and training
of youth involved in the sport of soccer and other sports, and funding for underprivileged
youth and individuals seeking to enhance their talents in the arts, education or athletics.

Recipients will be selected on an objective and nondiscriminatory basis. The primary
basis for selection will be demonstrated financial need. Evidence of significant academic
success and/or community service and involvement will also be taken into consideration.
No scholarships may be awarded to any of your directors, officers or employees, to a
member of the family of any of the foregoing, to any “substantial contributor’ to you, to a
member of the family of a “substantial contributor,” or to any other “disqualified person”
as defined in IRC § 4946(a) with respect to the you or to a member of the family of

any other “disqualified person.” No scholarships may be awarded for a purpose that is
inconsistent with the purposes described in IRC § 170(c)(2)(B).

Your Selection Committee will consist of two or more of your directors and/or officers
charged with the evaluation of candidates. Every member of the Selection Committee
shall adhere to your relevant policies as they may be adopted and amended from time to
time, including without limitation this Policy and your Conflict of Interest Policy. Every
member of the Selection Committee shall be obligated to disclose any personal
knowledge of and relationship with any potential scholarship recipient under
consideration and to refrain from participation in the award process in a circumstance
where he or she would derive, directly or indirectly, a private benefit if any potential
scholarship recipient or recipients are selected over others.

Applicants for scholarships will submit their application on the form provided by you as

well as any additional materials you deem appropriate on a schedule to be determined by
your selection committee. The number of applicants expected to be of sufficient size that
giving scholarships to one or more members of the applicant group fulfills a charitable
purpose.

You will pay scholarships directly to the institution or program that conducts the activities
for which a successful applicant has sought the scholarship, with a designation that it be
used for the awardee. A very brief report from scholarship recipients will be required,
confirming their actual participation in the program for which a scholarship is awarded.
You will send a request for such reports to awardees within sixty (60) days after the
conclusion of the program, as stated in their applications.

In accordance with Treasury Regulation Section 53.4945-4(c)(6), you will retain the
following records in connection with all scholarships: all information obtained by you in
the evaluation of the qualifications of potential recipients, the identification of recipients
(including any relationship of any recipients to you or to any of your directors or officers),
the purpose and amount of each scholarship, and any additional information you obtain in
complying with its scholarship administration procedures.

Records pertaining to any scholarship made pursuant to this policy shall be kept for no
less than three years after the filing of your annual tax return for the period in which the
last installment of such scholarship was paid.

In accordance with Treas. Reg. Section 53.4945-4(c)(4), you will investigate any misuse
of funds and withhold further payments to the extent possible if any information indicates
that scholarships are not being used for the purpose for which they have been awarded.
Furthermore, you will take all reasonable and necessary steps to (1) recover misused
scholarship funds or to (2) ensure restoration of such funds and their dedication to their
intended purposes.

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).

• 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