IRS approves a metropolitan-area scholarship program

Plain-English summary

A private foundation requested advance approval for a scholarship program serving full-time undergraduate students from a specified metropolitan area. Applicants would be evaluated on academic results, activities, leadership, employment or volunteering, affiliations, family income, and other financial aid. Scholarships could be renewed for up to four years, would be paid directly to the school, and required full-time enrollment, a C average, and good standing. The foundation also committed to an insider-exclusion rule, annual reports, diversion-of-funds procedures, and detailed grant records. The IRS approved the procedures as objective and nondiscriminatory 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 satisfy the advance-approval rules for grants to individuals?
• Outcome: Approved.
• Key authorities: IRC §§ 117(a), 117(b), 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g)(1)

Full text (IRS public release)

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

Number: 202124016
Release Date: 6/18/2021 Employer Identification Number:

Date: March 23, 2021 Contact person - ID number:

Contact telephone number:

LEGEND: UIL:4945.04-04
X= scholarship program
Y = city/state

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 operate a scholarship program called X for incoming undergraduate students
and current full-time undergraduate students each academic year.

X will be open to all students without regard to race, creed, color, nation origin, sex, or
religion and will be publicized through each college and/or university's scholarship or
financial aid office. Each school will have an application available for applicants to
complete in their respective offices and/or scholarship application systems.

Letter 4792 (10-2012)
Catalog Number 58263T

To be eligible, an applicant must be a full-time student from the greater Y metropolitan
area. Candidates must fill out an application; provide reference letters that must be from
a professor, school official, or other adult who knows the applicant well; and submit an
essay that discusses the individual's life, interests, dreams and aspirations, a description
of what the scholarship means to them, and provide their perspective on the significance
of human and civil rights in the past, present, and future.

Applicants will be evaluated based on their:

• Collegiate GPA (or ACT and/or SAT scores)
• School activities, leadership roles, and honors (high school/college)
• Outside activities (including employment and volunteering)
• Attendance or affiliations with other colleges/universities
• Family estimated annual income
• Amounts of other college scholarships or financial aid received

The number of scholarships awarded each year will be determined by your Board of
Trustees. The total value of scholarships awarded each year will be based off the Internal
Revenue Service distribution requirements for Private Foundations. The individual
amount of each scholarship will be based on the amount of funds available to be
awarded each year by dividing that amount evenly amount the total number of
scholarships to be awarded that year. The scholarship for each student will then be
divided in half so that an equal amount is awarded for the fall and spring semesters.

Scholarships can be renewed each year for up to four total years or when the student
graduates, whichever comes first. To maintain the scholarship between semesters, and
to qualify for renewal of a scholarship, a student must:

• Be a full-time student from the greater Y metropolitan area
• Maintain a “C” average while enrolled
• Remain in good standing while enrolled with the school

Each year during your annual Board of Trustees meeting, representatives from colleges
and universities will present new applicants for consideration as well as present
candidates who are eligible to have their scholarship renewed for the following school
year. Grade transcripts will be provided when necessary to confirm a student’s status and
grade point average.

Scholarship funds will be paid directly to the school attended by the recipient. If a
scholarship recipient violates set criteria, the school will inform the recipient they are no
longer eligible to receive funds and representatives from the school will no longer
recommend the student for renewal of the scholarship to your Board of Trustees.

Recipients of X are selected by your scholarship committee. Members of this committee
are nominated members of your Board of Trustees based off their passion for promoting
your mission through X, however, an individual nominated to be a committee member is

Letter 4792 (10-2012)
Catalog Number 58263T

free to accept or deny the position. At all time, the committee will consist of at least two
members of your Board of Trustees. Relatives of your officers, directors, substantial
contributors, and selection committee are not eligible for any awards.

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 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 diversion from
occurring.

You represent that you will maintain case histories and document recipients of grants,
including names, addresses, amount of grants, purpose of grants, manner of selection,
and proof that they were not related to officers, trustees, or donors.

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

Letter 4792 (10-2012)
Catalog Number 58263T

• 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