IRS grants advance approval of a foundation's first-year college scholarship program for local high school seniors

Plain-English summary

A private foundation runs a scholarship program helping graduating high school seniors from a specific area with their first-year college expenses. 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 under IRC § 4945(g)(1). The IRS found the selection objective and nondiscriminatory (scored on academics, activities, essays, recommendations, and financial need, with a company's officers and marketing director recommending finalists to the board) with adequate reporting and oversight, so the procedures qualify. Grants made under these procedures will not be taxable expenditures, and awards used for qualified tuition and related expenses are not taxable to recipients (subject to IRC § 117(b)). The award is one-time (not renewable) and paid directly to the school; the approval is limited to this foundation and this program as described.

Ruling snapshot

• Question: Do the foundation's first-year college scholarship procedures qualify for advance approval under IRC § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC § 4945(d)(3), (g)(1); §§ 117, 170(b)(1)(A)(ii); Treas. Reg. § 53.4945-4

Full text (IRS public release)

Department of the Treasury Date: 02/15/2022
Internal Revenue Service
Tax Exempt and Government Entities Taxpayer ID number:
P.O. Box 2508
Cincinnati, OH 45201 Person to contact:
Name:
ID number:
Telephone:

Number: 202219018
Release Date: 5/13/2022

LEGEND UIL: 4945.04-04
B = Area
C = Name
d = Number
e dollars = Amount

Dear

You asked for advance approval of your scholarship procedures under Internal Revenue Code (IRC) Section
4945(g)(1). You requested approval of your scholarship program to fund the education of certain qualifying
students.

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.

Additionally, 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)).

Description of your request
Your letter indicates you will operate a scholarship program for graduating high school senior students from
B. The purpose of your program is to aid students with their expenses in their first year of college education.
You intend to award e dollars with up to d grants per school year.

To be eligible for a scholarship, the student must:

• Be a graduating high school senior student from B, planning to attend college, university, or trade
  school full-time in the fall after high school graduation

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

• Maintain an unweighted cumulative grade point average of 3.0 or above

You will rate the applicants based on the following criteria:

• Academics
• Community service
• Extracurricular activities, awards, and leadership roles
• Educational and career goals and objectives
• Essay statement/writing skills
• Letters of recommendation
• Work experience
• Financial need

You will give preference to students majoring in finance, business, or economics, however, you will consider
all other majors.

Once you confirm the student's enrollment, you will make payments directly to the institution the student
attends. The scholarship is only available for the first year of college education and is not renewable.

Your scholarship program will be publicized on C's website. Interested students can review the requirements and
submit the application on-line. Students whose parent(s), brother(s), sister(s), or grandparent(s) work for C are
not eligible to apply.

Your selection committee will consist of officers from C who will score the applicants and make
recommendations. The recommendations will then be forwarded to C's Marketing Director and the Marketing
Director will review the recommendations and score the applicants based on the selection criteria. The top five
candidates will be submitted to your board for final award determination. Relatives of members of the selection
committee, or of your officers, directors, or substantial contributors, will not be eligible for awards. In the event
that the terms of the award are violated and the student is unable to use the award, an alternative recipient will
be chosen.

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.

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

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.

• 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).

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.
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