Need-based scholarship procedures approved

Plain-English summary

A private foundation asked the IRS to pre-approve its need-based scholarship procedures. Under section 4945, a private foundation's grants to individuals for study are "taxable expenditures" that trigger an excise tax unless the IRS approves the award procedures in advance under section 4945(g)(1). This foundation's scholarships cover tuition, fees, room and board, books, supplies, and travel for students enrolling full-time at community colleges, four-year universities, vocational programs, or a private high school. Applicants must be U.S. citizens or legal residents, show financial need, and have at least a 3.0 GPA; a selection committee ranks them on need and academic performance, and the money goes straight to the school's financial aid office. Awards are renewable if the student keeps up financial need and satisfactory academic progress. The IRS approved the procedures, so grants made under them are not taxable expenditures as long as the program runs as described, and the awards are tax-free scholarships to recipients under section 117 when used for qualified expenses.

Ruling snapshot

• Question: Do the foundation's need-based scholarship 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: 08/10/2022
Internal Revenue Service
Tax Exempt and Government Entities

Taxpayer ID number:
IRS P.O. Box 2508
Cincinnati, OH 45201

Person to contact:
Name:
Number: 202244032 ID number:
Release Date: 11/4/2022 Telephone:
LEGEND UIL: 4945.04-04

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). 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. The purpose of your program is to further your
charitable purposes by enabling deserving students to pursue their desired academic endeavors. The grants will
cover educational expenses including tuition, mandatory fees, room and board, books, supplies, travel, and other
significant expenses directly related to the recipients' enrolled educational programs. Portions of the scholarship
funds which are used for qualified educational expenses under IRC Section 117(b)(2) are intended to be
excluded from recipients' gross income. You will collaborate with the educational institutions to publicize the
scholarship program. You will draft a standard scholarship policy and application form will be made available
to students through the schools' website and/or financial aid offices.

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

You anticipate scholarships in the range of W will be awarded annually, depending on the number of applicants.
The amount of the grants will be based on available funds, projected educational costs, and applicant needs.
You estimate each award may be in the range of y dollars, and occasionally, you may grant larger awards in the
range of z dollars. The funds will be disbursed directly to the school's financial aid office and applied to the
recipient's student account.
To be eligible for a scholarship, the student must:

• Be seeking full-time enrollment at X, any community college, four-year university, vocational

training program, or private high school

• Be a citizen or legal resident of the United States

• Demonstrate financial need

• Demonstrate a minimum grade point average (GPA) of 3.0

In addition to basic identifying information, the applicant must submit the following with their application:

• A letter of recommendation
• Name of desired enrolled academic institution
• Intended major (if applicable)
• Current enrolled school (if applicable)
• Current GPA (if applicable)
• Resume and/or work experience
• Proof of household income by providing copy of two recent pay stubs or prior year tax return
• Estimated educational expenses for the academic year
• The current plan to pay for his or her education
• Estimated grants, awards, scholarships, loans, and contributions the student will receive for the academic year

All applications will be reviewed, evaluated, and ranked by a selection committee who will select recipients
based on their demonstrated financial need as well as academic performance. Your selection committee may
also consider the applicant's diverse or unique background, life experience, and hardships through the
applicant's submission of a personal statement or diversity statement. You will execute a scholarship agreement
with each recipient, requiring the grant be rescinded in the event you learn the recipient submitted false or
inaccurate information and/or funds were spent inappropriately.

The scholarships are renewable based on the recipients' continued demonstrated financial need as well as their
academic good standing and satisfactory progress toward completion of an awarded degree. You will obtain
progress reports from the educational institution that include information on courses taken and grades
received. Upon completion of the recipient's study, a final report will be collected from the recipient.

Relatives of members of the selection committee, or of your officers, directors, or substantial contributors are
not eligible for the scholarship awards. Selection committee will be appointed by your board of directors. No
selection committee members shall consist of individuals possessing a familial or business relationship with any
scholarship recipients and at no time will be in a position to receive private benefits, directly or indirectly.
Committee members will be required to disclose any potential conflicts of interest at all times.

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.

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

• 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.

• 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

• 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.

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

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