202313012: IRS approves need-based college scholarship procedures

Plain-English summary

A private foundation proposed scholarships for financially needy graduating
high school students attending accredited postsecondary institutions in a
specified state. The program would prioritize students from designated high
schools and could fund associate's, bachelor's, and other accredited
post-high-school degree programs. A selection committee would evaluate
financial need, academic achievement, and community service, while relatives of
committee members, officers, directors, and substantial contributors would be
ineligible. Awards generally would be paid directly to schools and could be
renewed for up to four years if recipients documented enrollment and progress.
The foundation also committed to monitor grant use, recover diverted funds, and
maintain detailed records. The IRS approved the procedures under section
4945(g)(1), so grants made under them would not be taxable expenditures.

Ruling snapshot

• Question: Do the need-based postsecondary scholarship procedures satisfy
  the advance-approval requirements of IRC § 4945(g)(1)?
• Outcome: Approved, subject to the stated selection, supervision, and
  recordkeeping conditions.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B), and
  4945(d)(3), 4945(g)(1).

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

IRS P.O. Box 2508

Cincinnati, OH 45201

Date:
01/04/2023
Taxpayer ID number:

Person to contact:

Release Number: 202313012
Release Date: 3/31/2023

LEGEND UIL: 4945.04-04
T = State

U = Name
V =Name
W = Name

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. Your purpose is to serve students with financial
need in the state of T. The purpose of your program is to provide scholarships to students attending an
accredited institution of higher education, pursuing (1) an associate’s degree at a community or junior college,
(2) a bachelor's degree at a college or university, (3) any other degree which is post-high school offered by an
accredited college. The number and total dollar amount of the scholarships to be awarded for an academic year
are determined by the Board of Directors. A minimum of scholarship will be awarded to a student
from each of the designated high schools consisting of U, V, and W. Any scholarships remaining after awards

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

to students from the designated high schools will be offered to graduating students at other T high schools
attending an accredited college. Your program is publicized through counseling offices at high schools in T,
which will announce and provide program materials and application forms to students.

In order to be eligible for the scholarship, the individual must:

• Be a graduating high school student seeking to attend an accredited institution of higher learning
• Be pursuing a degree at a post-high school offered by an accredited institution

Relatives of members of the selection committee, or of your officers, directors, or substantial contributors are
ineligible for awards made under your program.

The selection committee will consist of the Board of Directors and other family members who will select
recipients on an objective and nondiscriminatory basis. The selection committee will evaluate applications and
supporting materials based on criteria in the following order:

• Financial need
• Academic performance and achievements
• Community involvement and service

The selection committee will select the most qualified individuals and determine the individual grant amount
awarded to a particular recipient based on their financial need, cost of tuition, housing, books, and expenses.
You will notify the recipients in writing and will require the recipients to accept the grant in writing. Your
practice will be to pay scholarships directly to the educational institution on behalf of the student. The
educational institution will confirm that the student is enrolled and in good standing.

Funding is available for up to four years, if eligible. To be eligible, the recipient must submit a course and grade
report from the educational institution at the end of each semester showing that they are enrolled, progressing
towards their degree, and engaged in learning. If the recipient qualifies for renewal, the grant will be the same
amount as the previous year, unless a different amount is determined by the Board of Directors.

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.

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

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
TE/GE Stop 31A Team 105
P.O. Box 12192
Covington, KY 41012-0192

• 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,

Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Letter 437

cc:

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