IRS pre-approves a memorial scholarship for graduating high school seniors

Plain-English summary

A private foundation asked the IRS to approve, in advance, the procedures for a scholarship it runs in memory of a named individual. This approval matters because grants a private foundation makes to individuals for study are normally "taxable expenditures" that trigger an excise tax under section 4945, unless the IRS approves the procedures ahead of time under section 4945(g). The program awards an annual scholarship, paid in installments over four years of college, to a graduating senior from a specific high school who plans to attend an accredited college and meets GPA and other criteria. A selection committee (largely family members, with backup substitutes and conflict-of-interest recusal rules) ranks applicants on scholastic achievement, activities, recommendations, an essay, and financial need. The IRS approved the procedures under section 4945(g)(1), so the awards will not be taxable expenditures, and noted the scholarships are tax-free to recipients under section 117(b) to the extent used for qualified tuition and related expenses. Payments go directly to the college and cannot exceed the school's cost of attendance.

Ruling snapshot

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

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 05/10/2023
Tax Exempt and Government Entities Taxpayer ID number:

IRS P.O. Box 2508
, Cincinnati, OH 45201

Person to contact:

Release Number: 202331006
Release Date: 8/4/2023

LEGEND UIL: 4945.04-04
L= City

M = School

N = Number

O = Number

P= D

y 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 that will award an annual scholarship to a
graduating high school senior. The scholarship was created in memory of P who believed strongly in the value
of higher education.

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


Your purpose of the awards program is to provide a graduating senior with a substantial scholarship amount to
help further their goal of higher education. You plan to provide N scholarships each year. You will award a
minimum of a y dollars scholarship each year. You plan to award a single recipient; however, you maintain
flexibility to split amongst multiple recipients if you feel the decision to pick a single person proves difficult,
and multiples recipients are equally worthy.

Your y dollars award will be paid over four years of higher education, in four installments. The recipient must
maintain a 3.0 cumulative GPA while pursuing his university degree, in order to continue to receive each
additional payment.

The eligible applicant must be a graduating senior from M in L. The eligible applicant must be planning to
attend an accredited institution of higher education and must have a minimum cumulative GPA of 3.5.

You consider several factors in selecting a recipient beyond the GPA requirement. You will give a preference
towards applicants with strengths in the following areas:

1. Scholastic achievement: This could be in the form of an exemplary GPA, the number of Advanced Placement
(AP) classes and their performance in these classes, SAT/ACT scores or awards or performances in other
scholastic activities (math competition, chess tournament, etc.).

2. Participation in extra-curricular activities, athletics, and community involvement: This could be activities
such as student council, sports teams, volunteerism, after school jobs,etc.

3. Letters of recommendations from one or two mentors (teacher, counselor, principal, employer, etc.). At least
one letter must come from a teacher.

4, Character Essay: Each applicant shall submit a one page essay regarding a hardship they may have faced in
their life.

5. Financial need: The applicant has a page to indicate any information they would like to share regarding why
the scholarship will be financially important for them, and any financial circumstances they believe might be
relevant.

You will also give a preference towards STEM focused students but it is not a requirement.

You publish your scholarship award with the guidance counselor at M for the accessibility of all graduating
seniors. You also post the application materials on your website. The application is then submitted by email.

Your current selection committee consists of family members. In case of your inability to select a
recipient, two closed friends of P have agreed to be substitutes as needed. Each person on your selection
committee will independently review all completed applications. From the list, you will rank the top O
candidates in order. If you have a clear consensus on the recipient (i.e. all three members have the same top
choice), you will choose that recipient. If there is a not a consensus, your committee will enter into discussions
and attempt to agree to eliminate any applicants from contention on which you can agree. If you agree on a
recipient in discussions, that recipient will be chosen. If after a certain amount of time, you believe you are in a
stalemate between two or more candidates, one of the substitutes will be brought in to make a final decision.

Relatives of the selection committee are not eligible for the award. Additionally, if any member of the selection
committee believes there is a conflict of interest with an applicant they believe is deserving the award, that

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


committee member shall recuse themselves, and a substitute shall take their place.

Your scholarship payment shall be paid directly to the university or college of the recipient. The recipient signs
and agrees that the scholarship cannot and shall not exceed the total school's cost of attendance when all other
scholarships and sources of financial support are combined.

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.

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