IRS grants advance approval of a foundation's scholarship and educational grant procedures

Plain-English summary

A private foundation runs two programs that pay money to individual students: a scholarship program for graduating high school students, and a broader educational grant program funding things like music study, study abroad, or academic research. Grants to individuals can trigger an excise tax on a private foundation under IRC § 4945 unless the IRS approves the award procedures in advance. The foundation sought approval for the scholarship program under IRC § 4945(g)(1) and for the educational grant program under § 4945(g)(3). The IRS approved both, finding the selection objective and nondiscriminatory and the reporting adequate. Scholarship awards will not be taxable to recipients who use them for qualified tuition and related expenses (subject to IRC § 117(b)). The approval applies only to this foundation and these programs as described.

Ruling snapshot

• Question: Do the foundation's scholarship procedures (§ 4945(g)(1)) and educational grant procedures (§ 4945(g)(3)) qualify for advance approval?
• Outcome: Approved (both programs)
• Key authorities: IRC § 4945(d)(3), (g)(1), (g)(3); §§ 117, 74(b), 170(b)(1)(A)(ii); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury Date: February 8, 2022
Tax Exempt and Government Entities

IRS P.O. Box 2508 Taxpayer ID number:
Cincinnati, OH 45201
Person to contact:
Name:
ID number:
Number: 202218031 Telephone:
Release Date: 5/6/2022

LEGEND UIL: 4945.04-04
B = Program
C = Program
D = Individual
y dollars = Amount
z dollars = Amount

Dear

You asked for advance approval of your scholarship procedures under Internal Revenue Code (IRC) Section
4945(g)(1) and advance approval of your educational grant procedures under IRC Section 4945(g)(3).

This approval is required because IRC Section 4945 provides for the imposition of taxes on each taxable
expenditure of a private foundation. IRC Section 4945(d)(3) provides that the term "taxable expenditure"
includes any amount paid or incurred by a private foundation as a grant to an individual for travel, study, or
similar purposes by the individual, unless the grant satisfies the advance approval requirement of IRC Section
4945(g).

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.

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 IRC Section 117(b)).

We also approved your procedures for awarding educational grants. Based on the information you submitted,
and assuming you will conduct your program as proposed, we determined that your procedures for awarding
educational grants meet the requirements of IRC Section 4945(g)(3). As a result, expenditures you make
under these procedures won't be taxable.

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T

Description of your request

Your letter indicates you will operate B pursuant to IRC Section 4945(g)(1) and C pursuant to Section
4945(g)(3).

Through B, you plan to award scholarship grants to graduating high school students in amounts that will range
from y dollars to z dollars per year for up to four years of study. The scholarship grants will only be used for
expenses such as tuition, enrollment fees, books, school uniforms, computer and other supplies, travel and
relocation expenses and other expenses incident to the student's course of study. The scholarship amount may
be smaller than y dollars or larger than z dollars based on the student's expenses and financial situation. You
will accept applications on a continuous basis with no deadlines and there is no limit to the number of
scholarships in any given year.

Through C, you plan to award individuals or a team of individuals for various programs of study and the
awards will be granted to help advancing the students educational and leadership opportunities. The number of
grants and the amount of each will be based on the specific needs of the students and their proposed program or
project. For example, you may award a new music instrument and study with a musician off campus, study
abroad in pursuit of their language, arts, and history studies, or lab/academic research.

Both B and C information will be disseminated through your partnerships and collaborations with
communities, website, press releases, outreach, social media and D's speaking engagement. Applications are
available on your website.

There is no age minimum or maximum to apply. Eligible candidates must be students who are:

• In their junior or senior year of high school, on track to graduate, or are currently attending a college or
  university in the United States;

• Currently enrolled to or have been accepted into a college or university in the United States; and

• Exhibiting some financial need for assistance to pay tuition and related fees.

Applicants must submit an online application, two letters of recommendation, proof of enrollment, financial
information, and any other requested documentation.

Scholarship recipients will be selected on an objective and nondiscriminatory basis. The criteria will include:

• leadership skills
• excellent prior academic performance
• exhibited character, motivation, and potential
• personal references from the applicant's current school and teachers
• Financial need will be considered but is not necessarily required

In addition to the specific criteria above, you will also consider the program expenses needed for the specific
student to pursue their academic major, degree, and interest in studies in a particular field for C applications.

Your selection committee consists of a board of educators and recipients of earlier scholarships. Your staff will
first evaluate each application to determine completeness and meeting the base eligibility criteria. Then,
applications will be divided evenly to the selection committee. Each selection committee will assign points to
the applications. The applications will be given rank by grades and points given for their essays on leadership
and their letters of recommendation. The highest marked applications will be reviewed by all selection
committee members and then a final decision will be made. If the selection committee cannot decide, or if there
is a tie vote, D will be the tiebreaking vote. You do not anticipate any relatives of your selection committee,
officers, directors, or substantial contributors applying for the scholarships, but if an applicant is related to a

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T

member of the selection committee, the committee would not review the application.

You will require the scholarship recipients from B to provide grades received in each academic period and
annual report for courses taken. The grades and reports must be verified by the educational institution. Upon
completion of the studies, you must also receive a final report. To maintain the scholarship, the recipient must
maintain a minimum 3.3 GPA and the educational institution must provide periodic reports to you. If the
scholarship recipients fail to submit grade reports, do not meet the minimum GPA requirement, or fail to abide
by the terms of the scholarship, you will terminate the scholarship and cease disbursements of future payments.

You will require the grant recipients from C to submit reports on the use of the funds and the progress made.
The report must be made at least once a year. Upon completion, a final report will also be required that
describes the accomplishments and accounting for the funds.

You represent that you will complete the following:

• Arrange to receive and review grantee reports annually and upon completion of the purpose for which the
  grant was awarded,

• Investigate diversion of funds from their intended purposes,

• 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

• 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 also represent that you will:

• Maintain all records relating to individual grants including information obtained to evaluate grantees,
• Identify a grantee is a disqualified person,
  » Establish the amount and purpose of each grant, and
• Establish that you undertook the supervision and investigation of grants described above.

Basis for our determination

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

IRC Section 4945(g)(1) Requirements:

• 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 IRC Section 117(a).
• The grant is to be used for study at an educational organization described in IRC Section 170(b)(1)(A)(ii).

IRC Section 4945(g)(3) Requirements:

• 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 IRC Section 117(a) and is to be used for study at an educational
  organization described in IRC Section 170(b)(1)(A)(ii).
• A prize or award subject to the provisions of IRC Section 74(b), if the recipient of the prize or award is
  selected from the general public.

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T

• To achieve a specific objective; produce a report or similar product; or improve or enhance a literary,
  artistic, musical, scientific, teaching, or other similar skill or talent of the recipient.

To receive approval of its educational grant procedures, Treasury Regulation Section 53.4945-4(c)(1) requires
that a private foundation show:

• The grant procedure includes an objective and nondiscriminatory selection process.
• The grant procedure results in the recipients performing the activities the grants were intended to finance.
• The foundation plans to obtain reports to determine whether the recipients have performed the activities that
  the grants were intended to finance.

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 IRS at:
  Internal Revenue Service
  Exempt Organizations Determinations
  TE/GE Stop 31A Team 105
  P.O. Box 12192
  Covington, KY 41012-0192
• You can't 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'll make this determination letter available for public inspection after deleting personally identifiable
information, as required by IRC Section 6110. We've enclosed Letter 437, Notice of Intention to Disclose -
Rulings, and a copy of the letter that shows our proposed deletions.

• If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us.
• If you agree with our deletions, you don't need to take any further action.

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.

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T

If you have questions, you can contact the person shown at the top of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Letter 437

cc:

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T