IRS approves a foundation's scholarship procedures for youth-development program members under section 4945(g)(1)

Plain-English summary

A private foundation asked the IRS to bless, in advance, how it awards
scholarships to members of a youth-development and agricultural-education
program pursuing higher education. Private foundations owe an excise tax on
grants to individuals for study unless the award procedures are approved in
advance under IRC section 4945(g). The foundation described objective, points-
based selection (academics, leadership, an essay, financial need, references),
eligibility tied to program membership and livestock exhibition, and funds paid
directly to the college. The IRS determined the procedures meet section
4945(g)(1), so the grants are not taxable expenditures. The scholarships are
also tax-free to recipients under section 117 to the extent used for qualified
tuition and related expenses.

Ruling snapshot

• Question: Do the foundation's scholarship-award procedures qualify for advance approval under IRC § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 4945(d)(3), 4945(g)(1), 117(a)-(b), 170(b)(1)(A), 170(c)(2)(B)

Full text (IRS public release)

202245011

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
P.O. Box 2508
Cincinnati, OH 45201

Date: 08/18/2022
Taxpayer ID number:
Person to contact:

LEGEND UIL: 4945.04-04
B = Name
C = Name
d number = Number
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 to provide financial assistance for high-achieving C
members to pursue higher education at an accredited educational organization. C is an organization exempt
under IRC Section 501(c)(3) whose purposes consist of youth development and agricultural education. You
award d number scholarships each year in the amount of y dollars each, which will be paid over four years in
annual increments of z dollars. To apply for the scholarship, the applicant is required to provide specifics
including general academic information, a description of their activities, honors, and goals, financial

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

202245011

information, high school rank and guidance counselor verification. The application and supporting materials
must be submitted by a specific date to be considered.

To be eligible for a scholarship, a student must be pursuing a degree at an accredited four-year institution of
higher education, be a current member of the C youth development program, have exhibited livestock at the B
at least once during the years preceding the application, and be graduating from high school during the
school year the scholarship application is submitted.

A selection committee consisting of your board of directors will select recipients using the following criteria:

• Academic achievement

• Activities and leadership

• An essay

• Financial need

• References

• Exceptional circumstances

The selection committee will award points to applicants using objective criteria in each of the above areas. A
total of points is available in each area, with a maximum of total points for the application. Applicants
with the highest point totals will be awarded scholarships. The academic achievement component awards points
are based on grade point average, standardized test score, class rank, and other honors and awards. The financial
need component awards points are based on a descending scale based on whether the applicant's education is
financed: solely by the applicant; mostly financed by the applicant; financed % or more by parents or other
sources; or financed % by parents or other sources.

To maintain the scholarship, recipients must be full-time students at an institution of higher education. Each
year prior to disbursing scholarship funds, you will require recipients to confirm they are enrolled for at least
credit hours by submitting their class enrollment schedule to you. After you have confirmed their enrollment
status, you disburse funds directly to the applicable institution of higher education to apply the funds for the
enrolled student in good standing. If the terms of the scholarship are violated, you cancel the scholarship and
make no further disbursements of 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.

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

202245011

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.

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.

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

202245011

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

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