High school scholarship procedures approved

Plain-English summary

A private foundation asked the IRS to approve, in advance, the way it awards a scholarship, so that the payments would not count as "taxable expenditures" that trigger excise tax under section 4945. The scholarship is a one-year award of a fixed amount to a graduating senior at a particular high school who has at least a 3.0 GPA and plans to attend a two- or four-year college full-time. Applicants submit a 500-word essay, a selection committee of board members narrows the field, and the full board picks one recipient; committee members' families are not eligible. The foundation pays the award directly to the recipient's chosen school, follows up to confirm full-time enrollment, and will try to recover funds if the student does not follow through. The IRS approved the procedures under section 4945(g)(1), meaning grants made under this program are not taxable expenditures as long as the foundation runs it as described. The awards can also be tax-free scholarships to the recipients under section 117 if used for qualified tuition and related expenses.

Ruling snapshot

• Question: Do the foundation's scholarship award procedures satisfy IRC § 4945(g)(1) so the grants are not taxable expenditures?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)(1)

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 5/23/22
Tax Exempt and Government Entities
P.O. Box 2508 Person to contact:
Cincinnati, OH 45201 Name:
Taxpayer ID number: ID number:
Telephone:

Number: 202232024
Release Date: 8/12/2022

LEGEND UIL: 4945.04-04
X = Scholarship

Y = High School

z 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 X to foster educational opportunities, advancement, and enrichment. The
goal is to recognize an individual who embodies the spirit of Y, and academic experience. X will be in the
amount of z dollars. You will maintain records of all recipients which will include names and addresses.

The applicant must be a senior at Y, with a GPA of at least 3.0, and plan to attend either a two or four-year
college/university full-time. You will publicize X through the list the high school provides for available
scholarships.

The application will consist of a 500-word essay discussing an accomplishment, event or realization that

Letter 4792 (Rev. 11-2021)
Catalog Number 58263T

sparked a period of personal growth and a new understanding of themselves or others.

The scholarship is for one year only. The selection committee will consist of your board members, which will
bring four or five applicants to the full board, to choose one recipient. The selection committee's family is not
eligible for X.

You will give the scholarship directly to the school of the recipient's choice. You will supervise the scholarship
with a follow-up that the student matriculate into the college or university on a full-time basis. You will follow
up with the college or university to ensure the student is enrolled. Should the student not fulfill the requirements,
you will attempt to recover 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 grantee 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 X 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 May 25, 2021, which is the date your request was submitted.

• 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:

Letter 4792 (Rev. 11-2021)
Catalog Number 58263T

Internal Revenue Service

Exempt Organizations Determinations
TE/GE Stop 31A Team 105

P.O. Box 12192

Covington, KY 41012-0192

• You can't X 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 X
  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.

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,

Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (Rev. 11-2021)
Catalog Number 58263T