IRS approves one-time university scholarships

Plain-English summary

A private foundation proposed one-time academic scholarships for current or incoming students at a specified university. All such students could apply, with preferences for graduates of particular high schools and students in specified majors. The foundation's board would select recipients using the applicant's high school, grade point average, ACT score, intended major, essay, and recommendation. Relatives of insiders and selection committee members, as well as other disqualified persons, were ineligible. Funds would be paid directly to the university and returned if a recipient did not attend, and the foundation committed to reporting, monitoring, recovery, and recordkeeping procedures. The IRS approved the objective and nondiscriminatory procedures under Section 4945(g)(1).

Ruling snapshot

• Question: Do the foundation's proposed one-time university scholarship procedures satisfy the advance-approval requirements?
• Outcome: Approved.
• Key authorities: IRC §§ 117(a)-(b), 170(b)(1)(A)(ii), 170(c)(2)(B), and 4945(g)(1)

Full text (IRS public release)

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

Number: 202120017
Release Date: 5/21/2021 Employer Identification Number:

Contact person - ID number:
Date: February 23, 2021
Contact telephone number:

LEGEND UIL: 4945.04-04
W = Scholarship

X = University

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 operate a scholarship program called W.

The purpose of the program is to provide academic scholarships for students attending X.
Scholarships are currently in the amount of y dollars, with amounts and number of
scholarships depending upon available funds. You expect a candidate pool of between
200 and 250 students. The program is publicized on your and X’s website and via
applications distributed to school counselors.

Letter 4792 (10-2012)
Catalog Number 58263T

All students currently attending or who will attend X may apply. Preference will be given
to students from particular high schools and those who major in specific fields.

Scholarships will be awarded on an objective and nondiscriminatory basis. Selection
criteria will include high school attended, GPA, ACT score, intended university major, a
written essay and letter of recommendation. The selection committee will be composed of
your board of directors. Relatives of members of the selection committee, or of your
officers, directors, or substantial contributors are not eligible for awards made under your
program. Grants will not be provided to “disqualified persons”.

Scholarships are provided on a one-time basis (not renewable). Funds are provided
directly to X prior to the fall semester. If the student does not attend, X will refund the
money to you.

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 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 related to the following: (1) individual
grants, including information obtained to evaluate grantees, (2) whether a grantee is 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.

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).

Letter 4792 (10-2012)
Catalog Number 58263T

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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T