A private foundation gets advance approval for its scholarship procedures, so grants to students won't be taxable expenditures

Plain-English summary

A private foundation runs a scholarship program that pays tuition and a living stipend for under-resourced students in one city, and it asked the IRS to pre-approve how it picks recipients. This matters because a private foundation that gives money to individuals for study normally makes a "taxable expenditure" that triggers excise tax under section 4945, unless the IRS approves the award procedures in advance under section 4945(g). The foundation recruits students entering 8th grade, supports them through a five-year program, and then pays post-secondary tuition (after other aid) for those who complete it. The IRS approved the procedures. It found the foundation will award grants on an objective, nondiscriminatory basis, will bar awards to insiders and their relatives, and will keep records and follow-up on each student. As a result, the grants are not taxable expenditures, and they are tax-free scholarships to the students if used for qualified tuition and related expenses under section 117(b). The approval is limited to the described program and assumes the foundation runs it as proposed.

Ruling snapshot

• Question: Should the IRS grant advance approval of the foundation's scholarship award procedures under section 4945(g)?
• Outcome: Approved (procedures meet IRC § 4945(g)(1); grants are not taxable expenditures)
• Key authorities: IRC § 4945(g)(1); § 117(a)-(b); § 170(b)(1)(A)(ii); § 170(c)(2)(B)

Full text (IRS public release)

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

Number: 202144033 Employer Identification Number:
Release Date: 11/5/2021

Contact person - ID number:
Date: August 10, 2021

Contact telephone number:

LEGEND

UIL: 4945.04-04
B = Scholars Program
C = City, State

Dear

You asked for advance approval of your scholarship grant procedures under
Internal Revenue Code (IRC) 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 IRC 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 IRC Section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program called B.

Your purpose is to further charitable purposes described in IRC Section 501(c)(3) of the
Code. The purpose of B is to provide scholarships for under-resourced students located
in C,

Description:

Students who complete your B program will have 100 percent of their tuition (after

financial aid, room and board, and a monthly living stipend) paid for by you for any post-
secondary educational institution. You will choose four new students who are entering

Letter 4792 (10-2012)
Catalog Number 58263T

the 8th grade to enroll in your program each year. Your program will increase post-
secondary education readiness, access, and completion by offering support, mentoring
and skill building.

Criteria

Middle school students who will be attending 8th grade in location C are eligible to apply
for your program. Students who complete your five-year program are eligible for the
scholarship.

Promotion

You will advertise and promote your program at middle schools and a community center
in C. You represented that schools where you advertise your program have significant
populations of lower-income and minority students. You provided a draft copy of your
program application with your application for advance approval of grant making
procedures under IRC Section 4945(g)(1).

Selection Procedures

When selecting your recipients you will consider factors such as financial need, academic
performance and the ability of participants to meet the requirements of your program,
which requires a commitment of 10 hours a month during the school year and 10 hours a
week for 8 weeks each summer until the student graduates from high school. Each
student has monthly requirements and will be required to attend a group meeting each
year. Relatives of members of the selection committee or of your officers, directors, or
substantial contributors are not eligible for awards made under your program.

Follow-up Procedures

Tuition payments will be made directly to the educational institution. Your Director will
conduct quarterly check-ins with the educational institution to ensure the student remains
in good standing. Living stipends will be paid to the students. Each scholarship recipient
will receive a college mentor that they will be required to check in with periodically and
prior to receiving their living stipend each year. You will require annual reports from the
students on the progress being made toward his or her degree program.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(IRC 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 Section 4945(g) is not a taxable expenditure.

e The foundation awards the grant on an objective and nondiscriminatory basis.
e The IRS approves in advance the procedure for awarding the grant.
e The grant is a scholarship or fellowship subject to the provisions of Section 117(a).

Letter 4792 (10-2012)
Catalog Number 58263T

The grant is to be used for study at an educational organization described in
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 IRC 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