IRS approves a private foundation's scholarship procedures for children of an organization's members

Plain-English summary

A private foundation asked the IRS for advance approval of the procedures it uses to award scholarships, as section 4945(g)(1) requires. Without this approval, grants a private foundation makes to individuals for study can be "taxable expenditures" that trigger excise taxes under section 4945. The foundation runs a scholarship program for the children of the members of a related organization to attend undergraduate or graduate school. It publicizes the program to members, selects recipients on academic merit, extracurricular activities, and leadership through a committee, pays funds directly to the recipient's school, and bars awards to relatives of committee members, officers, directors, or substantial contributors. The IRS approved the procedures, finding they meet the requirements of section 4945(g)(1). As a result, grants made under these procedures will not be taxable expenditures, and the awards qualify as tax-free scholarships to recipients to the extent used for qualified tuition and related expenses under section 117. The approval is conditioned on running the program as described, keeping records, supervising grants, and not awarding grants to insiders or their relatives.

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 05/17/2023

Tax Exempt and Government Entities Taxpayer ID number:
IRS P.O. Box 2508
Cincinnati, OH 45201 Person to contact:

Number: 202332019
Release Date: 8/11/2023

LEGEND UIL: 4945.04-04
X = Organization

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 children of members of the X to attend an
undergraduate or graduate program at an educational institution.

You will publicize the scholarship program to the members of the X by letter each spring and on the X's
website. Your scholarship committee will determine the number and amount of the scholarship awards annually
based on your financial status.

In order to apply, applicants must be a child of a member of the X, enrolled at an accredited college or
university, and considered a full-time student in an undergraduate or graduate program. The scholarship is not
renewable but recipients are eligible to re-apply and receive one additional scholarship award in a subsequent

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


year.

Your scholarship committee selects recipients based on academic merit (GPA), extracurricular activities, and
leadership qualities. Members of your scholarship committee must be members in good standing of the X who
are passionate and dedicated to give back to the X. Relative of members of the scholarship committee, or of
your officers, directors, or substantial contributors are not eligible for scholarship awards.

You will distribute scholarship funds directly to the recipient's school and the school will apply the funds for the
student as long as such student is in good standing and considered to be a full-time student under the school's
definition. In the event the recipient withdraws from or does not attend the school, the funds must be returned to
you.

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.

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


¢ 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.

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