A foundation may make forgivable educational loans to future local medical providers

Plain-English summary

A private foundation proposed a low-interest educational loan program for students pursuing healthcare careers. Recipients would commit to return to a specified community and work as medical providers, with a portion of each loan forgiven for every year of qualifying service. The foundation would advertise broadly, apply stated academic and geographic criteria, pay funds directly to educational institutions, review transcripts, and seek repayment if recipients violated the program's terms. It also agreed to obtain annual reports, investigate diversions, recover misused funds, and maintain grant records. The IRS approved the procedures under section 4945(g)(3), treating the long-term educational loans as grants that further an exempt purpose rather than taxable expenditures.

Ruling snapshot

• Question: Do the foundation's procedures for service-linked educational loans satisfy the advance-approval rules for grants to individuals?
• Outcome: approved (loans made under the described procedures will not be taxable expenditures)
• Key authorities: IRC §§ 74(b), 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g); Treas. Reg. § 53.4945-4(c)(1); Rev. Rul. 77-434; Rev. Rul. 77-44

Full text (IRS public release)

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

                                                            Employer Identification Number:
Date: March 12, 2020

                                                            Contact person - ID number:
Number: 202023009
Release Date: 6/05/2020

                                                            Contact telephone number:

LEGEND                                                     UIL: 4945.04-04
B = Name

C = Number

D = Number

E = Number

F = Number

x dollars= Amount

Dear                  :

You asked for advance approval of your educational grant/loan 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 loans. Based on the information
you submitted, and assuming you will conduct your program as proposed, we determined
that your procedures for awarding educational grants/loans 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

Your letter indicates that you will operate an educational loan program. Your purpose is
to improve the health of the community and promote health education as well as support
the local community hospital.

The purpose of your program is to assist qualified applicants with the cost involved in
obtaining a college education to pursue a career in healthcare, in exchange for agreeing
to serve as a medical provider in B upon graduation. Your program will be structured as a
loan program for up to D years at C%. The educational loan will be forgiven at a rate of
E% per year as long as the recipient practices medicine in B.

You will promote your program through announcements in local publications and on social
media as well as through notifying the B Public School Superintendent to communicate
the availability of the program as well as application procedures to each high school
guidance counselor. You will also contact the various medical schools in the general
geographic region of B to promote your program.

To be eligible to apply for the program, the applicant must:

• Reside, or have previously resided in B;

• Maintain an un-weighted cumulative grade point average (GPA) of 3.0 or better;

• Commit to return to B and work in the medical field.

To apply for your program, qualified applicants must submit your application with all
required attachments including:

• A thorough explanation on why they are applying for your program including the
  field of knowledge being pursued, reasons for the decision, and what they hope to
  do with the degree/knowledge;

• Educational transcripts;

• An up-to-date resume including education level, work experience, community
  service experience and functions, and goals/objectives.

Concerning the application due date, you do not currently operate on any specific grant
cycle but applicants must submit their application package for the program typically at
least one month before your next scheduled board meeting.

All applications will be reviewed and evaluated by your selection committee consisting of
your Board and representatives from the local high schools. You have no time limits to
respond to applicants, but you meet quarterly and will base funding decisions on
resources available, close alignment of the applicant’s background and goals to your
mission, and the number of qualified applicants during that funding cycle.

You intend to award no more than F educational loans per year and will determine the
amount based on the actual costs which the recipient is obligated to provide you each
term. The amount will not exceed x dollars in the aggregate.

All proceeds will be paid directly to the qualified educational institution that the recipient is
attending. The qualified educational institution is responsible for assuring the minimum
requirements are met and will submit a copy of the recipient’s transcript for each
semester.

You will evaluate any violation of the program on a case-by-case basis. You will work
with the university and the recipient to remedy the violation(s) if possible. In the event the
violation(s) cannot be remedied you will seek re-payment from the applicant. In addition,
examples of instances in which the loan would not be forgiven include if the recipient:

• Pursues another field;

• Quits the program;

• Does not finish their obligation to practice medicine; or

• Does anything that would terminate the intent of the program.

You represent that you will complete the following: (1) arrange to receive and review
grantee reports annually and upon completion of the purpose for which the grant was
awarded, (2) investigate diversion of funds from their intended purposes, and (3) take all
reasonable and appropriate steps to recover the diverted funds, ensure other grant funds
held by a grantee are used for their intended purposes, and (4) withhold further payments
to grantees until you 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 the following: (1) all records relating to individual
grants including information to evaluate grantees, (2) identify whether a grantee is a
disqualified person, (3) establish the amount and purpose of each grant, and (4) establish
that you undertook the 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 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.

Long-term, low-interest loans that private foundations make for educational purposes can
be considered grants under Code Section 4945(g)(3) and Revenue Ruling 77-434, 1977
2 C.B. 420.

In addition, Revenue Ruling 77-44, 1977-1 C.B. 355, indicates that a scholarship
grant to a grantee who makes a moral commitment to perform service in a particular
area after graduation is a grant to further an exempt purpose under section
4945(g)(3) of the Code, rather than Section 4945(g)(1), and that such grant is not
excludable from income under Section 117.

Other conditions that apply to this determination

• This determination covers only the grant/loan program described above. This
  approval will apply to succeeding grant/loan 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 grants/loans 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 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 grant/loan distributions with the IRS if necessary.

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