IRS pre-approves a foundation's scholarship and educational-grant procedures under § 4945(g)(1) and (g)(3)

Plain-English summary

A private foundation asked the IRS to pre-approve two kinds of individual grant programs: scholarships and fellowships (under section 4945(g)(1)) and broader educational grants (under section 4945(g)(3)). A private foundation that gives grants to individuals for study or similar purposes normally makes a "taxable expenditure" subject to excise tax unless the IRS approves its selection procedures in advance. The foundation runs a program that funds studies, research, travel, and living costs for students, including low-income students, drawn from a broad charitable class in a local region. A selection committee of board members picks recipients on objective, nondiscriminatory criteria (academic performance, recommendations, work experience, financial need shown by an "economic gap," and essays), and relatives of insiders are barred from applying. The IRS approved both sets of procedures. It found they meet the section 4945(g)(1) requirements for scholarships (objective selection, IRS pre-approval, section 117 scholarship, study at a qualifying school) and the section 4945(g)(3) requirements for educational grants (including the regulation's demands that the process be objective, that recipients actually perform the funded activity, and that the foundation obtain reports). Because the procedures qualify, the grants are not taxable expenditures, and scholarship awards are tax-free to students to the extent used for qualified tuition and expenses under section 117. Approval covers only this program as described and requires ongoing recordkeeping, monitoring, and reporting. It matters to foundations that fund students' education and want to avoid excise-tax exposure.

Ruling snapshot

• Question: Do the foundation's scholarship procedures qualify under § 4945(g)(1) and its educational-grant procedures under § 4945(g)(3)?
• Outcome: approved (both sets of procedures)
• Key authorities: IRC § 4945(d)(3), (g)(1), (g)(3); IRC § 117(a), (b); IRC § 74(b); IRC § 170(b)(1)(A)(ii); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

Department of the Treasury Date: 06/05/2023
Internal Revenue Service

Tax Exempt and Government Entities
IRS P.O. Box 2508

Cincinnati, OH 45201

Taxpayer ID number:

Person to contact:

Name:
Release Number: 202335017 ID number:
Release Date: 9/1/2023 Telephone:
LEGEND UIL: 4945.04-04

X = Scholarship Program
Y = City, State

b dollars = $
C = Number
Dear

You asked for advance approval of your scholarship procedures under Internal Revenue Code (IRC) Section
4945(g)(1) and advance approval of your educational grant procedures under IRC Section 4945(g)(3).

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.

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)).

We also approved your procedures for awarding educational grants. Based on the information you submitted,
and assuming you will conduct your program as proposed, we determined that your procedures for awarding
educational grants meet the requirements of IRC Section 4945(g)(3). As a result, expenditures you make
under these procedures won't be taxable.

Description of your request

Your letter indicates you will operate a program named X to make scholarship or fellowship grants to
individuals for their studies or research projects in various academic fields, including travel, room and board, or
similar purposes related to their educational attainment. The purpose of any scholarships, fellowships or grants
will be to invest in the education of individuals attending academic institutions or enrolled in vocational
training, further scholarship in various academic areas, and provide financial assistance to students, including

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


low-income students, seeking to break the cycle of poverty.

You indicated that the grant amounts will be between b dollars, and you will grant approximately C awards per
year.

You will advertise the program by providing the grant criteria and application to other non-profit organizations
that engage with a broad charitable class of applicants within the local community.

You anticipate the pool of eligible candidates to include individuals attending academic institutions or enrolled
in vocational training or further scholarship in various academic areas who require financial assistance and who
are not disqualified persons. There will be no limitations or restrictions in the eligibility criteria or procedures
based on race, religion, national or ethnic origin or other illegally discriminatory criteria. You indicated that
initial applicants will likely reside in or around the Y region, but also anticipate the geographic reach may be
broader in subsequent years. There are no restrictions on the number of applicants; all persons who submit
proposals or applications of substance will be considered.

To select grant recipients, the Scholarship Selection Committee will consider the proposed project or course of
study, prior scholarship or community achievements, financial need, and any other qualifications deemed by the
Board to be relevant to the objectives of the grants. There will be no limitations or restrictions in the selection

criteria or procedures based on race, religion, national or ethnic origin, or other illegally discriminatory criteria.

Additionally at this time, there is no minimum GPA required for selecting recipients, but the Scholarship
Selection Committee plans to evaluate applicants based on the following criteria: (i) demonstrated academic
performance (including high school and college transcripts, where applicable); (ii) teacher recommendations,
(iii) work experience, especially in support of their academic course of study or in support of the existing family
financial obligations; (iv) financial need, specifically a demonstrated "economic gap" in the money required to
support the applicant’s course of study and the tuition/related expenses being charged by the educational
institution (including any other loans or scholarships earned); and (v) the applicant’s answers to a series of
essay topics included on the X Application.

The Scholarship Selection committee will determine financial need by considering the following criteria: (i)
annual income of the applicant’s family and the family’s ability to support both the applicant’s educational
goals as well as other financial obligations for additional family members; and (ii) a demonstrated " economic
gap" in the money required to support their course of study and the tuition/related expenses being charged by
the educational institution (including any other loans or scholarships earned). At this time, you have not
established a preset financial threshold for qualification but instead will consider the above-mentioned criteria
in light of the entire application.

The Selection Committee will be comprised of at least two (2) members of your Board who commit to
participate in the selection process, which may include reviewing proposals, academic records and application
materials (such as essays) and interviewing candidates.

Relatives of members of the selection committee, or of your officers, directors, or substantial contributors are
not eligible to apply for scholarships or grants.

The funds will be distributed either directly to the educational institution or directly to the recipient in cases
when the Scholarship Selection Committee determines direct receipt of funding is more beneficial to the
applicant, in light of the entire application. You will not require recipients to perform any services after
receiving the grant.

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


Prior to disbursement of funds, scholarship recipients will be required to agree in writing to submit reports to
you on a regular basis. You will monitor and evaluate recipients’ use of funds using these reports and may
interview recipients about the progress of their research or studies. Any apparent misuse of funds will be
promptly investigated, and further disbursements, if any, will be held until the completion of any investigation.
Recipients will be required to immediately return funds that you determine have been improperly used.

You will require that recipients interested in renewing a scholarship, fellowship, or grant continue to
demonstrate there is a financial need for their enrollment in an academic institution or vocational course. Grants
may be renewed on a case-by-case basis, dependent upon the availability of funds and at the Board of Director’s
discretion.

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.

IRC Section 4945(g)(1) Requirements:

* 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).

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


IRC Section 4945(g)(3) Requirements:
¢ 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 IRC Section 117(a) and is to be used for study at an educational
organization described in IRC Section 170(b)(1)(A)(ii).

- A prize or award subject to the provisions of IRC Section 74(b), if the recipient of the prize or award is
selected from the general public.

- To achieve a specific objective; produce a report or similar product; or improve or enhance a literary,
artistic, musical, scientific, teaching, or other similar skill or talent of the recipient.

To receive approval of its educational grant procedures, Treasury Regulation Section 53.4945-4(c)(1) requires
that a private foundation show:

¢ The grant procedure includes an objective and nondiscriminatory selection process.
¢ The grant procedure results in the recipients performing the activities the grants were intended to finance.

* The foundation plans to obtain reports to determine whether the recipients have performed the activities that
the grants were intended to finance.

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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Letter 437

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