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

Plain-English summary

A private foundation asked the IRS to approve, in advance, the way it picks
students to receive scholarships. Private foundations owe an excise tax on
"taxable expenditures," and a grant to an individual for study counts as one
unless the foundation gets its award procedures blessed in advance under IRC
section 4945(g). Here the foundation was merging two existing scholarship
programs into one renewable award covering part of a student's unmet financial
need, paid directly to the college. The IRS determined the procedures are
objective and nondiscriminatory and meet section 4945(g)(1), so grants made
under them are not taxable expenditures. The awards also qualify as tax-free
scholarships to the students to the extent used for qualified tuition and
related expenses under section 117.

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)

202245013

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

Date: 08/17/2022
Taxpayer ID number:
Person to contact:

LEGEND UIL: 4945.04-04

B = State of Recipient Residency
C = State, County of Recipient Residency
D = Scholarship Program
E = Former Scholarship Program
F = Number of Grants
G = State of Educational Institution
y dollars = Grant 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 full-time students in B or C who are seeking an
associate or a bachelor's degree in the student's state of residency.

You seek to combine your existing programs known as the D and the E. The surviving program will also be
known as the D.

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

202245013

Your existing programs support non-traditional students, many of whom have voiced confusion over which of
the two existing programs they should apply. You seek to reduce barriers and believe that combining the D and
the E will simplify the process. The D will award up to F renewable scholarships, which is the total number of
scholarships awarded under the existing programs.

Your award is designed to cover % of the unmet financial need of the student recipient, as determined by the
college of attendance. The award will have a range of y dollars per academic year, per student. You pay
scholarship funds directly to the educational institution. Scholarships are renewable provided the student is in
good academic standing, maintains a minimum 2.0 GPA, and is a full-time student.

You will publicize your program via your website and through promotional materials to community colleges
and universities in B and C.

To be eligible for a scholarship the student must:

• be a resident of B or C

• be a high school graduate or have previously acquired a GED

• have a goal of earning an associate or bachelor's degree with at least one full year remaining in a program

• plan to attend full-time at a federal financial aid eligible public or private (nonprofit) college based in B or G,
  beginning in the fall of the application year

• be a single or married parent of any age with custody of dependent children, or is an adult over the age of
  without children as of of the application year

• have no felony convictions, or if the student has a felony conviction, have satisfied the terms of the conviction
  by August 1 of the application year

Your selection committee consists of scholarship program alumni, people with experience working with diverse
populations, and people who work with college students, or have experience working in education, counseling,
advising, financial aid, or social work.

Your scholarships are awarded on an objective and nondiscriminatory basis, applying the following selection
criteria:

• commitment to roles in school, home and/or community activities

• outstanding character

• a concern for others through volunteer service and/or help with family needs

• initiative, responsibility, and a strong work ethic through paid and/or unpaid work experience

• a capacity for future academic success shown by high school or college GPA and coursework

Applicants undergo three levels of review. First, your staff members complete an initial review of applications
to determine eligibility and validity. Then the applications are reviewed by teams of three, and each reviewer
reads and independently scores the same set of applications. The team then discusses scores and collectively
decides which applications from their set will move to interview. Lastly, applicants are interviewed by a team of
three.

Relatives of officers, directors, and your key employees are not eligible for awards. Your other staff members
and family members of volunteer reviewers are eligible and may be awarded a scholarship based upon the same
terms and conditions as the general public. You provide regular training regarding conflicts of interest and
require reviewers to disclose any relationship to a known applicant and recuse themselves from any related
decision-making.

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

202245013

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.
• 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

202245013

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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Letter 437

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