IRS approves a private foundation's college scholarship program under section 4945(g)(1)

Plain-English summary

A private foundation asked the IRS to approve, in advance, the way it hands out college scholarships. This approval matters because a private foundation that makes grants to individuals for study normally triggers an excise tax under section 4945 unless the grant program's procedures are approved ahead of time under section 4945(g). The foundation's program awards need-based scholarships to students from a particular county, administered through a community foundation, with objective eligibility and selection criteria, grants paid directly to the students' schools, and record-keeping and follow-up to guard against misuse of funds. The IRS determined the procedures meet section 4945(g)(1), so grants made under them are not taxable expenditures, and the awards are treated as tax-free scholarships to recipients under section 117 to the extent used for qualified tuition and related expenses. The approval takes effect April 30, 2021 (the date the request was submitted) and applies to later programs only if they do not differ significantly.

Ruling snapshot

• Question: Do a private foundation's scholarship-award procedures qualify for advance approval under IRC § 4945(g)(1)?
• Outcome: Approved (individual grants under the program are not taxable expenditures).
• Key authorities: IRC § 4945(d)(3) and (g)(1); IRC § 117; IRC § 170(b)(1)(A)(ii).

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

Tax Exempt and Government Entities
IRS P.O. Box 2508

Cincinnati, OH 45201

Date: March 14, 2022

Taxpayer ID number:

Release Number: 202223017

Release Date: 6/10/2022 Person to contact:

Name:
ID number:
Telephone:

LEGEND UIL: 4945.04-04

X = Scholarship Program

Y = County

Z = Community Foundation

V = State

W = Unrelated Nonprofit Program

T = Country

S = Minimum Number of Students
R = Maximum Number of Students

N = Tax Year
u dollars = $
q dollars = $
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 X. The purpose of X is to provide scholarship to students from Y to attend
two-year and four-year colleges. You stated that X will foster and support Y students in their personal and
educational growth through financial assistance in attending college. You anticipate distributing u dollars in tax
year N. X is administered through Z, a public charity, which also administers other scholarships for students in
the State of V. Along with other scholarships administered by Z, X is publicized through a variety of print,
broadcast, and internet-based media. Z also conducts outreach with high schools, colleges, and the community at

large. You use Z’s common application for scholarships, which applicants use to apply to all scholarships offered
and administered by Z.

X has the following eligibility requirements:
e Be a resident of the State of V
¢ Demonstrate financial need
e Be in academic good standing

The following criteria used to select recipients of X:

e Be a high school senior or previous graduate of a high school located within Y V, with preference given
to current high school seniors

e Candidates must have participated in the W program while in high school, with preference for candidates
who have completed at least 3 years of W classes

e Attend an accredited two-year or four-year, public or private, not-for-profit post-secondary institution in
V (outside of Y) or in the T

e Attend college as a full-time student (as determined by the college’s financial aid office)

While number of grants distributed through X may vary from year-to-year, the intent is to award significant
scholarships to both new and returning recipients each year with an overall goal of assisting S - R students per
year. Your Board of Directors will determine the amounts of the grants each year through discussions and
informed by data regarding the cost of a college education. You aim to award scholarships of q dollars per year
to each recipient in tax year N, but this amount may vary depending on multiple factors. For renewal grants, the
recipient must remain enrolled in a qualifying two-year or four-year public or private not-for-profit post-
secondary institution in V (outside of Y) or in the T and must maintain a required minimum GPA.

You pay grants directly to schools under arrangements whereby the school will apply the grant funds only for
enrolled students who are in good standing. You have contracted with Z for supervision of the scholarships. Z
obtains reports and grade transcripts from recipients as part of its common application. You pay grant funds
directly to the scholarship recipients’ schools. In the event that the recipient or the recipient’s school informs Z of
a change in the recipient’s status (i.e., enrollment), Z will determine at that time if the recipient is no longer
eligible, and if not, recover the scholarship funds from the school on your behalf.

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.

« 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.

• The effective date of our approval is April 30, 2021, which is the date your request was submitted.
  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