Private foundation's need-based scholarship procedures receive advance approval

Plain-English summary

A private foundation asked the IRS to approve procedures for scholarships serving financially needy graduates of high schools in a specified county and state. The program would award approximately a redacted number of scholarships each year, pay up to a redacted amount annually for four years, and send payments directly to accredited post-secondary institutions. Financial need would be the primary selection factor, with academic record, activities, character, residence, goals, and recommendations also considered. Insiders, their families, and other disqualified persons could not receive awards, and the foundation committed to recordkeeping, annual reports, and steps to address diverted funds. The IRS approved the procedures under Section 4945(g)(1), so grants made under them would not be taxable expenditures and could be tax-free to recipients when used for qualified tuition and related expenses.

Ruling snapshot

• Question: Do the scholarship procedures qualify for advance approval under Section 4945(g)(1)?
• 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

Release Number: 202139010
Release Date: 10/1/2021

Date: July 6, 2021                               Employer Identification Number:

                                                  Contact person - ID number:

                                                  Contact telephone number:

LEGEND                                            UIL: 4945.04-04
B = Scholarship
C = County, State
D = number
w 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 B. The purpose of B is
to make a lasting difference in the lives of recipients by providing them a quality
education despite economic conditions. Scholarships will be awarded for post-secondary
education to students who are in financial need and who are graduating, or have
graduated, from a high school located in C.

Letter 4792 (10-2012)
Catalog Number 58263T

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You plan to award approximately D scholarships annually. Scholarship amount per
recipient will be up to w dollars per academic year for up to four years. Award amounts
will be distributed directly to the educational institution (educational organizations
described in Code Section 170(b)(1)(A)(ii)). You will publicize B on your website and via
distribution of materials to high schools and the local media.

Those eligible to apply are students who are graduating, or have graduated, from a high
school in C with proof of acceptance or admittance to an accredited post-secondary
institution. Applicants must submit the application for B along with a selected portion of
their FAFSA (Free Application for Federal Student Aid).

Scholarships will be awarded on an objective and nondiscriminatory basis. Selection
criteria will be primarily focused on financial need but will also include other factors such
as academic record, extracurricular activities, character, place of residency (preference
for residents of C), academic goals, and recommendations of teachers, counselors, and
principals. The selection committee will be your board of directors. In the future, you may
establish a grant committee to supervise B. Your founders, directors, officers, staff, and
families of or any disqualified person with respect to you will not be eligible for B.

Scholarships will be renewed each year if the recipient demonstrates financial need and
provides a copy of transcripts to evidence minimum credit hours per term and satisfactory
academic performance. You will maintain case histories showing recipients of B,
including names, addresses, purpose of award, amount of grant, manner of selection,
and relationship (if any) to your officers, directors, trustees, and donors.

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 and 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 grantees will take extraordinary precautions to prevent future diversions from
occurring.

You represent that you will maintain the following: (1) all records relating to individual
grants including information to evaluate grantees, (2) identify if a grantee is a disqualified
person, (3) establish the amount and purpose of each grant, and (4) establish that you
undertook the supervision and investigation of 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.

Letter 4792 (10-2012)
Catalog Number 58263T

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• 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.

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

Letter 4792 (10-2012)
Catalog Number 58263T

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Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T