IRS pre-approves a foundation's college-mentoring 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 (under section 4945(g)(1)) and educational grants (under section 4945(g)(3)). When a private foundation gives money to individuals for study or similar purposes, that spending is a "taxable expenditure" subject to excise tax unless the IRS approves the selection procedures in advance. The foundation runs a program that supports first-generation and financially challenged college students, pairing each with an advisor who guides them through applications and stays with them through graduation, and funding the gap between what a student can afford and full college costs. Recipients are selected on objective criteria (family unfamiliarity with college, academic or cultural gaps, and financial need), relatives of insiders are barred, and participants must attend an accredited school full-time and follow conduct rules. The IRS approved both sets of procedures. It found the scholarship procedures meet the section 4945(g)(1) requirements and the educational-grant procedures meet the section 4945(g)(3) requirements, including the regulation's demands for an objective selection process, recipients who actually perform the funded activity, and foundation 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 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:

Release Number: 202335018
Release Date: 9/1/2023
LEGEND UIL: 4945.04.04

X = Name
y dollars = Amounts
z dollars = Amounts

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 grant making program called X, which provides grant funding to
support successful college experiences for select first generation and/or financially challenged college students
in order for them to attend a qualifying educational institution. Through X, you plan to award funds to
supplement financial aid, merit scholarships, a student's work-based income, and a family's capability to
contribute toward a college education as well as provide guidance during a participant's tenure in college. You
predict that you will distribute in the range of y dollars over years, providing approximately z dollars per

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


year to each participant to attend school at full cost.

Eligibility criteria for X include (i) low family familiarity with the college process/attending college resulting in
inadequate guidance, (ii) potential academic and/or cultural gaps due to a student's background, exposure, and
the rigor of the student's high school curriculum, (iii) the student's ability to fund the monetary gap between
what they can afford to contribute to college costs. Relatives of members of the selection committee, or of your
officers, directors, or substantial contributors are not eligible for awards made under X.

X is publicized to students who match with X's college advisors in the spring of their junior or fall of their
senior year of high school. This matching is achieved (i) via external college access programs or (ii) via
recommendations from a current recipient or school that is aware of X.

Students who fit the eligibility criteria and match with the X's college advisors will hold an initial meeting to
confirm the appropriateness of the match. Matched students then work with their advisor throughout the college
application process and, once college applications are submitted, advisor will determine if the student merits
continued support through matriculation. The decision of whether to offer a student to participate in X is based
on the advisor's experience during the application and post-application process which allows for evaluation of
the student's potential to succeed in X, as well as their willingness to welcome and maintain an ongoing
advisory relationship. Your selection committee composed of your copresidents will make all final decisions in
regard to recipients. If X grows, the selection committee will be broadened to include other advisors or staff as
well as replace the Co-Presidents with a Program Director.

Any student selected to become a participant in X will remain an active recipient for their entire undergraduate
college experience provided the student signs an agreement to adhere to the guidelines of X. Specifically,
participants:

* Must attend a US-based, non-profit accredited educational institution that maintains a regular facility and
curriculum and has a body of students in attendance.

¢ Must maintain a full-time course load in each semester, and anything less than full-time enrollment must be
pre-approved by their advisor.

¢ Are not required to maintain a certain GPA but should their GPA fall below a 3.0, their status will be reviewed
by their advisor to determine whether they should receive supplementary support. In cases where the fall in
GPA is determined to be due to lack of effort, the participant's status will be reviewed by the advisor and your
Co-Presidents, and their grant may be revoked.

¢ Are expected to graduate in four years but should circumstances result in requiring a fifth year to graduate and
the participant is in good standing based on the advisor's assessment, they will be allowed to remain in X for an
extra year.

Advisors' responsibilities to participants will include:

* Investing time to understand college resources specific to each participant. These resources include college
advising, health and wellness resources, first generation or low socioeconomic resources, career services, etc.

¢ Maintaining time for scheduled check-ins and other required meetings as well as be available to make time for
non-scheduled meetings should participants need to consult them.

¢ Traveling at least once per year to meet with a participant in person unless the participant and advisor
mutually agree that this is unfeasible.

* Checking grade transcripts to ensure a participant's GPA is at or above 3.0.

_ Behaviors that may result in loss of the participant's privileges or probation include, but are not limited to:
¢ Failure to meet identified requirements of X,

* Failure to maintain good academic standing,

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

¢ Failure to engage with others within and outside of the university community with proper respect, including
but not limited to respectful and timely communication.

Behaviors that may result in dismissal from X include, but are not limited to:

¢ Driving under the influence,

¢ Use or possession of a controlled substance,

* Use or possession of a false identification,

¢ Any instance regarding fraud, theft, misrepresentation, dishonesty, or deceit,

¢ Any arrest or any violation of the participant's university Honor Codes, regardless of judicial outcome or
whether the University imposes sanctions.

The determination of whether a participant has not adhered to X's guidelines such that funding will be
discontinued will be solely determined by X's advisors, and such a decision would be reviewed by your Co-
Presidents before becoming final. All actions inconsistent with the standards of X will be examined and
addressed on a case-by-case basis. You reserve the right to act on disciplinary matters in any way that it deems
appropriate, in your sole discretion.

A participant may withdraw from X at any point during their undergraduate college experience without penalty,
but by agreeing to participate initially, said participant consents to an exit interview to understand rationale and
improve X going-forward.

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.

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

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).

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.

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


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

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