Advance approval of scholarship procedures for a trust converted from a student-loan fund

Plain-English summary

A private foundation set up as a charitable trust asked the IRS to pre-approve its scholarship selection procedures under Section 4945(g). The trust originally made low-cost student loans, but it got court approval to change its terms to award scholarships instead. 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. The program helps residents of a specific county who are graduating high school seniors or undergraduates (not graduate students) pay for college or professional education. A three-member selection committee appointed by a local judge picks recipients based on academic ability, character, citizenship, and financial need, with checks made payable jointly to the student and the school. 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 trust'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: 202043008
Release Date: 10/23/2020 .
Employer Identification Number:

Date: July 30, 2020
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
B= Scholarship Program
C= County, State

Dear

You asked for advance approval of your scholarship grant procedures under
Internal Revenue Code (IRC) 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 IRC 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 IRC Section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program called B. The purpose of B is
to enable deserving women and men to complete a college, university or professional
education at a reduced cost to themselves. The scholarship will be publicized by flyers
and emails distributed by the guidance counselor at the high school. The number and
amounts of scholarships will vary based on available funding. You have sought and
received court approval to change the terms of the trust to give out scholarships instead

of low-cost loans.

Letter 4792 (10-2012)
Catalog Number 58263T

To be eligible for the scholarship applicants must live in C and be a graduating high
school senior, or college freshmen, sophomore, junior or senior.
Scholarships will not be available for graduate students.

Recipients will be selected by selection committee consisting of three individuals living in
B and appointed by a district court judge. The selection committee will choose recipients
based on the student’s demonstrated academic ability and desire, character, good
citizenship, and economic necessity.

Checks are made payable to both the student and the selected college/university or trade
school. For college students, checks are issued once enrollment has been verified. For
incoming college freshman award checks are issued for second semester tuition of their
first year of school. Scholarships will not be renewable.

You represent 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 obtained to evaluate grantees, (2) identify whether a grantee
is a disqualified person, (3) establish the amount and purposes 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
(IRC 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 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 IRC Section
117(a).

• The grant is to be used for study at an educational organization described in IRC
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.

Letter 4792 (10-2012)
Catalog Number 58263T

• 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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T