Advance approval of a scholarship program that recruits students through youth charities

Plain-English summary

A private foundation asked the IRS to pre-approve the selection procedures for a scholarship program it runs. Advance approval matters because a private foundation that pays a grant to an individual for study normally owes an excise tax on that "taxable expenditure" under Section 4945, unless the IRS has pre-approved objective, nondiscriminatory selection procedures. This program finds candidates through the foundation's work with youth charities, inviting promising students who typically have not received other financial aid to apply. Invited students submit an online application with detailed financial information and essays, and a selection committee of the foundation's trustees picks recipients based on academic performance, financial need, and overall strength. Awards are paid directly to the school, and recipients must attend a four-year program, keep at least a 3.0 GPA, and perform community service, with insiders' relatives excluded. The IRS approved the procedures, finding they meet Section 4945(g)(1), so the grants won't be taxable expenditures, and the awards are tax-free to recipients used for qualified tuition and related expenses under Section 117.

Ruling snapshot

• Question: Do the foundation's scholarship selection procedures qualify for advance approval under Section 4945(g)(1)?
• Outcome: approved
• Key authorities: IRC § 4945(g)(1); IRC § 117(a), (b); 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

Number: 202043007
Release Date: 10/23/2020
Employer Identification Number:

Date: July 28, 2020
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
B = Name

C= Number

D= Number

E= Number

x 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 provided in Code Section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program called B. The purpose of B is
to provide the necessary financial support to students who need assistance with their
educational costs to attend a four-year undergraduate program at a qualified educational
institution in which they were granted admission.

Letter 4792 (10-2012)
Catalog Number 58263T

To find qualified applicants, you will identify and invite promising C students you meet
through your work with charities that focus on youth. The candidates who are invited will
typically not have received financial aid through other channels. From this group of C
students, you will award in the range of D scholarships which will be annually determined
by your board. Your board will also determine the amount of each award on a case by
case basis depending on how much financial aid the candidate needs and the overall
tuition amount at their school. You will dedicate about x dollars annually for B.

To be considered, invited students must complete an online application with required
attachments including detailed financial information and complete responses to
numerous essay questions. Students will typically be seniors in high school or
undergraduate students enrolled at a qualified educational institution. Applications will be
reviewed by a selection committee consisting of your trustees who will select recipients
based on the applicants’ academic performance and demonstrated financial need, and
the overall strength of the application.

Once a scholarship is awarded the recipient will be required to attend a 4-year
undergraduate program and achieve at least a 3.0 GPA as well as participate in E hours
of community service each year.

You will pay the scholarship directly to the academic institution whereby the school will
apply the grant funds. Recipients will be required to submit school transcripts to insure
strong academic standing. You will also obtain reports from charitable organizations to
verify the community service requirement has been met. If a student violates the terms of
the scholarship program, you will continue payment for the semester in question however
the student will be disqualified for aid for the following semester. If the student is able to
once again maintain good academic standing, they can reapply for the scholarship.

Children or relatives of your officers, directors, substantial contributors or selection
committee members are not eligible for your scholarships.

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 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 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 relating to individual grants, including
information obtained to evaluate grantees, identify whether a grantee is a disqualified
person, establish the amount and purpose of each grant, and establish that you
undertook the supervision and investigation of grants described above.

Basis for our determination

Letter 4792 (10-2012)
Catalog Number 58263T

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.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T