IRS approves a foundation's scholarship procedures for local high school and vocational students under section 4945(g)(1)

Plain-English summary

A private foundation asked the IRS to approve, in advance, how it awards
scholarships. Private foundations owe an excise tax on grants to
individuals for study unless the IRS pre-approves the award procedures
under IRC section 4945(g). This foundation's program provides financial
assistance to graduating high school seniors and current vocational and
technical students in a particular area so they can continue their
education at accredited postsecondary institutions or vocational
programs. It plans a growing number of annual grants, selected on merit
(academics, community service, work experience, activities, and
character), with financial need considered if the applicant qualifies for
federal food and nutrition programs. Insiders and their relatives are
barred, and funds go either to the school or directly to the recipient
with conditions. The IRS determined the procedures meet section
4945(g)(1), so the grants are not taxable expenditures, and the awards
are 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)(ii), 170(c)(2)(B), 4946

Full text (IRS public release)

202247017

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

Date: 08/29/2022
Taxpayer ID number:
Person to contact:

Release Number: 202247017
Release Date: 11/25/2022

LEGEND UIL: 4945.04-04
B = Scholarship Award
C = number
D = number
E = number
F = City, State
G = HIGH SCHOOL
x 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 a grant program called the B to provide financial assistance to enable
graduating high school seniors, and current vocational and technical training program students, to further their
educations at accredited postsecondary institutions or qualifying vocational and technical training programs.

You anticipate awarding annual grants worth x dollars each, starting with C grant your first year, D your

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

second, and E for your third and subsequent years. Grant amounts will vary based on the actual costs and term
lengths of your recipients' chosen areas of study. Although grants are not renewable, recipients may reapply and
compete for future grants, but no preference will be given for prior selection.

You will publicize your grants on your website, the websites and platforms of guidance offices in the F area,
and regional and national platforms providing relevant scholarship search services. Members of your selection
committee will also promote your grants to potential applicants.

Eligible applicants must be current students or graduates of high schools in the greater F area and submit a
complete application, personal statement, and letters of recommendation.

Selection criteria will include academic achievement, community service, work experience, extracurricular
activities, and the character of the applicant as demonstrated by leadership and service to others, perceived
future potential, and a strong work ethic. Financial need may also be considered if applicants provide proof of
eligibility for federal supplemental food and nutrition programs. You will award scholarships on an objective
and non-discriminatory basis.

Your selection committee will consist of no less than five graduates of G who have resided in the greater F area
for a minimum of one year. Members must demonstrate a personal history and commitment to the betterment of
the community, in addition to the requisite knowledge, experience, and abilities to serve on your committee.
Members must commit to terms of at least one year and will be selected and replaced at the discretion of your
board. Children, grandchildren, or other close relatives of your officers, directors, substantial contributors, and
other individuals considered disqualified persons under Section 4946 of the Code are not eligible for
scholarships. Further, your selection committee members and close relatives are not eligible for scholarships.

Grants will be disbursed to educational institutions or directly to grant recipients on a case-by-case basis. Where
funds are disbursed to educational institutions, you will require each institution agree to disburse funds for
qualified tuition or other expenses to those recipients who are enrolled full-time and remain in good standing
with the institution. If a grant recipient fails to enroll, drops out, or does not remain in good standing, such
institutions will be required to return all unused funds to you.

Where grants are awarded directly to scholarship recipients, you will require each recipient to sign and return an
acceptance letter agreeing to the requirements and conditions of the grant. Those requirements and conditions
include providing an official college/university, trade school or vocational training acceptance letter, a
commitment to remaining in good standing with the educational institution, and a written narrative report
describing the recipient's experiences and accomplishments over the pertaining academic year.

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

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

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