IRS approves scholarships for financially challenged students overcoming obstacles

Plain-English summary

A private foundation proposed scholarships and nonfinancial support for high school students who had overcome significant obstacles and planned full-time college study. Eligible students initially would be juniors in public, charter, or magnet schools in a specified metropolitan area and would need documented financial need. Staff and outside community or school reviewers would score applicants on resilience, engagement with others, willingness to seek challenges, problem solving, and commitment to learning. The board would select finalists and determine award amounts, with scholarships available for tuition, fees, room, board, and basic living expenses. Recipients had to remain enrolled and in good standing, report each semester, and agree to monitoring and recovery procedures for diverted funds. The IRS approved the procedures under Section 4945(g)(1), so grants made under them would not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation's proposed scholarship procedures for financially challenged students 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: 202120018
Release Date: 5/21/2021

Employer Identification Number:
Date: February 23, 2021

Contact person - ID number:

Contact telephone number:

LEGEND: UIL:

B= cities 4945.04-04
C = number

D = number

y dollars= amount 1
z dollars= amount 2

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 provide in Code Section 117(b)).

Description of your request

You will provide support to high school students who plan to enroll in a full-time degree
granting program at a higher education institution after graduation and who have
overcome significant obstacles in their pursuit of higher education. While your focus will
be on students in the B metropolitan area, you may consider other geographic locations in
the future. The support you provide includes scholarships intended to cover tuition, fees,
room and board, and basic living expenses. Support may also include non-monetary

Letter 4792 (10-2012)
Catalog Number 58263T

resources such as SAT/ACT tutoring, financial aid guidance, and assistance identifying
internship and mentorship opportunities based on a recipient’s educational and
professional interests. Should you decide to offer non-monetary support, you may partner
with other charitable organizations, schools or consultants.

The scholarship amount may vary based on the individual needs of the recipients and
availability of funds, but you anticipate selecting C recipients per year and award up to Z
dollars over four years.

To be eligible for a scholarship, students must be:
• Currently a junior enrolled in an accredited B metropolitan area public school,
including public, charter, and magnet schools; and
• Planning to enroll in a full-time degree granting program at a higher education
institution following high school graduation; and
• Challenged financially to attend college and can document financial need.

You will evaluate potential recipients on the following criteria, in addition to documented
financial need, knowing that all criteria may not be applicable to each potential recipient
due to their history and the nature of the scholarship sought:
• Resilience
• Engagement with and for others
• Seeks challenges
• Problem solver
• Committed and active learner

All applications will first be reviewed, scored and ranked by your staff. Additionally, a
group of external reviewers composed of local community leaders or representatives of
schools will assist in reviewing the applications. Based on scores from your staff and
external reviewers, approximately D finalists will be presented to your Board of Directors
for final selection.

Your Board of Directors will determine the number of scholarships to be awarded each
year based on the qualifications and needs of applicants. Currently, you expect to award
no more than D scholarships per year ranging in amount from y dollars to z dollars.

In order to maintain the scholarship, you will require recipients to continue enrollment and
academic good standing at a college or university. Recipients will be required to submit a
report each semester outlining their use of funds, as well as academic transcripts. You
will review the use of funds on a regular basis.

Recipients will be required to sign an agreement, which will outline the requirements
related to reporting, as well as explain to them that you will investigate any diversions of
funds and that you will take steps to recover funds not used for their intended purposes.

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

Letter 4792 (10-2012)
Catalog Number 58263T

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.

Letter 4792 (10-2012)
Catalog Number 58263T

• 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

Letter 4792 (10-2012)
Catalog Number 58263T