IRS approves business scholarship procedures for a high school senior

Plain-English summary

A private foundation proposed an annual scholarship for a graduating high school senior who planned to attend a four-year college and pursue business or entrepreneurial business studies. Trustees would select one recipient based on academic achievement, financial need, school and sports involvement, community service, and submitted essays. The nonrenewable award would be paid in two installments after proof of enrollment, and the student would have to attend classes and maintain at least a 2.75 grade-point average. Relatives of selection committee members, officers, directors, and substantial contributors were ineligible, and the foundation would supervise the grant, investigate diversions, and retain records. The IRS approved the procedures under IRC § 4945(g)(1).

Ruling snapshot

• Question: Did the one-student college scholarship program meet the advance-approval requirements of § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170, and 4945

Full text (IRS public release)

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

Employer Identification Number:

Date: November 10, 2020
Contact person - ID number:

Contact telephone number:

Number: 202105012
Release Date: 2/5/2021

LEGEND                                      UIL: 4945.04-04

X = School
y 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 award an educational scholarship to a college-bound high
school senior who demonstrates academic achievement, financial need, and an interest
in pursuing a degree in business or entrepreneurial business.

The scholarships are listed on the X website. Students eligible to apply must be a
graduating senior at X intending to continue their education at a four-year college.
Previous scholarship recipients cannot re-apply. Relatives of members of the selection
committee, or of your officers, directors, or substantial contributors are not eligible for

scholarships under your program.


In order to apply, eligible students must submit a scholarship application on the form
provided by the X Board of Education by a specific date.

Your trustees determine the recipient of the scholarship by reviewing application materials
and essays submitted by applicants. When selecting recipients, consideration will be
given to academic achievement, financial need, school and sport involvement, and the
student’s community service record.

You will award one scholarship annually, currently fixed at y dollars, payable in two equal
installments. Scholarships are not renewable.

Upon receiving proof of enrollment from the recipient's choice of a four-year college, two
payments will be made, one for the fall semester and one for the spring semester.
Scholarship recipients must attend classes and maintain no lower than a 2.75 grade-point
average.

Recipients shall provide reports and/or grade transcripts prior to distribution of funds,
demonstrating they have maintained the required minimum grade-point average. If the
recipient in unable to maintain the grade-point average, the scholarship to such individual
shall lapse.

You represent that you will (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 adequate supervision and investigation of diversion of grant funds.

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