Advance approval of a foundation's scholarship and educational-grant procedures

Plain-English summary

A private foundation asked the IRS to pre-approve two individual-grant programs tied to promoting a particular philosophy: a scholarship program under Section 4945(g)(1) and an educational-grant program under Section 4945(g)(3). A private foundation that gives money to individuals for study or similar purposes normally owes an excise tax on that "taxable expenditure" under Section 4945 unless the IRS approves its selection procedures in advance. The scholarship program awards tuition help to students showing academic merit and financial need, scored on an objective rubric, with awards paid to the student or school and annual reports required. The grant program funds projects (such as a book, thesis, or report) or skill development for people showing talent and need, with proposals, budgets, and progress reports required. The foundation excludes its own insiders and other disqualified persons, promises not to discriminate, and commits to monitoring grants and recovering any misused funds. The IRS approved both sets of procedures, finding they meet Sections 4945(g)(1) and 4945(g)(3), so the expenditures won't be taxable, 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 and educational-grant procedures qualify for advance approval under Sections 4945(g)(1) and 4945(g)(3)?
• Outcome: approved
• Key authorities: IRC § 4945(g)(1) and (g)(3); IRC § 117; IRC § 170(b)(1)(A)(ii); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

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

Number: 202043011
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 = Concept
C = Individual

Dear

You asked for advance approval of your scholarship and educational 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.

Our determination

We approved your procedures for awarding scholarships and educational grants. Based
on the information you submitted, and assuming you will conduct your program as
proposed, we determined that your procedures for awarding scholarships and
educational grants meet the requirements of Code Sections 4945(g)(1) and 4945(g)(3).
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 intend to provide scholarships and fellowships/grants which support your charitable
and educational programs and activities. Your programs will assist individuals who
demonstrate commitment towards advancing and promoting C’s philosophy known as B.

4945(g)(1) Scholarship Program
Your letter indicates you will operate a scholarship program. The purpose of the
scholarships is to assist students demonstrating academic merit and financial need to

further their education.

It is expected that the scholarship amounts will be used by the recipient for tuition, books,
or living expenses while attending school. Scholarships will be restricted to students who

are or will be enrolled in a formal educational program leading to a certificate or degree at
an accredited school or educational institution that qualifies under Sections 509(a)(1) and
170(b)(1)(A)(ii) of the Code.

The amount of each scholarship will be determined by the cost of tuition at the specific
educational institution and the student's demonstrated financial need, taking into account
any other financial aid the applicant expects to receive.

Your scholarship application is available on your website. Each application will be
evaluated based upon an objective rubric to be designed by you giving weight to the
applicant’s academic achievement, recommendations, essay responses, and financial
need. The financial need criterion will be determined by you based upon a review of a
financial need assessment and consideration of any other financial aid the applicant
expects to receive.

The conditions placed upon the scholarships shall be that: the recipient must be enrolled

and in good standing in an eligible educational institution, and the scholarship must be
used to cover the cost of the student's tuition, fees, books, room and board, research,
fees and other expenses associated with the completion of the recipient's degree or
certification.

All scholarships awarded are expected to be paid either directly to the recipient or the
accredited educational institution in which the recipient is enrolled provided the
educational institution agrees to use the amounts awarded for their intended purposes.
You will require an annual report from each educational institution for the purpose of
confirming the recipient's enrollment, good standing and academic performance (e.g.,
courses taken, grades received, etc.).

4945(g)(3) Grant Program

You will also operate an educational grant program. You intend to provide grants to
improve or enhance the teaching, education, or other similar capacity, skill or talent of the
grantee, and achieve a specific objective, or produce a particular product (e.g., book,
thesis, report, etc.) collectively.

You stated the purpose of the grants is to assist individuals who demonstrate talent,
potential, and perseverance in a particular field of interest, and financial need, to pursue
their interests in that field. It is expected that the grant amounts will be used by the
recipient for travel, registration fees, living and other expenses related to the pursuit of
the recipient's chosen field of interest.

You require an application for your grant program, which is available on your website.
The application process includes submission of a proposal, including a budget. The
application requires the applicant to describe their familiarity with B, as well as any prior
successful projects.

Grants will be awarded to individuals who meet the following requirements:

1. Demonstrate financial need;
2. Demonstrate knowledge and understanding of B; and
3. Demonstrate ability to produce a report or other similar product; or for improving
   or enhancing teaching education, or other similar capacity, skill, or talent of the
   grantee.

Each grant application will be evaluated based upon an objective rubric to be designed
by you giving weight to an applicant's talent, potential, and perseverance in their chosen
fields of interest or their demonstrated commitment towards a specific objective or the
development of a specific product (e.g., book, thesis, report, etc.), and financial need.

The conditions placed upon the grants shall be that: the grant must be used by the
recipient for travel, registration fees, living and other expenses for the pursuit of the
recipient's chosen field of interest which is related to improving or enhancing the
teaching, education, or other similar capacity, skill, or talent of the recipient, to further a
specific objective, or to facilitate the development of a particular product (e.g., book,
thesis, report, etc.).

For fellowship grant awards made to fund particular projects not involving coursework
(e.g., book, thesis, report, etc.), you will require an annual report describing the project
and verifying its progress by the supervising faculty member or another appropriate
official at the educational institution, with a final report being submitted to you upon the
project's completion. Annual reports will not be required if the fellowship grant awards are
paid directly to the accredited educational institution in which the recipient is enrolled
provided that the educational institution agrees to use the amounts awarded for their
intended purposes and the recipient is in good standing at the educational institution.

For both programs, the recipients shall be selected by the board, with the assistance of a
committee comprised of officers and/or your employees to assist the board with the
operation of the program from time to time. At no time in the award application process
will you discriminate against any applicant on the basis of race, religion, creed, color, sex,
age, physical or mental disabilities, sexual orientation or national origin. You will not
provide educational loans.

There is no limit on the number of potential applicants for these programs. Award
recipients will not be chosen from any particular educational or scientific institution, or
from any particular geographic location. Therefore, the potential recipients are broad
enough to constitute a charitable class.

The amount of each scholarship and grant is intended to vary, with such amount
dependent on the available funds and the number of applications received. No fewer than
one award is expected to be made in each fiscal year. You do not require any services to
be performed before, during, or after the applicant receives an award.

The following individuals shall not be eligible to apply for or receive an award from you:
(a) any employee of yours, as well as any family member of such an individual; (b) any
executive, officer, or director of you, as well as any family member of such an individual;
and (c) any otherwise "disqualified person" with respect to you as defined by Section
4946 of the Code, as well as any family member of such an individual.

At your discretion, you may renew any award so long as you are not in receipt of
information indicating misuse of the award by the recipient, all required reports
concerning the recipient have been received, and the recipient continues to satisfy the
conditions of the award and remains eligible to receive the award.

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, (3) take all
reasonable and appropriate steps to recover the diverted funds, ensure other grant funds
held by the 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 related to the following: (1) individual
grants including information to evaluate grantees, (2) grantees which are identified as a
disqualified person, (3) how the amount and purpose of each grant was established, and
(4) how you established supervision and investigation of the 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 Regulation 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 only covers the grant programs 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