Four-year fellowship procedures approved

Plain-English summary

A private foundation proposed a four-year fellowship for local high school graduates and GED recipients who attend a four-year university and want work experience in a city's business community. The foundation planned to award one fellowship each year, pay a redacted amount each semester, and require recipients to maintain a 2.5 grade-point average, carry at least 12 credit hours, and complete government-affairs work experience in the metropolitan area. Selection would consider academics, extracurricular activities, community service, and an essay, while relatives of foundation insiders and selection-committee members would be ineligible. The foundation would review transcripts, monitor each grant, investigate diverted funds, seek recovery when appropriate, and suspend payments until misuse was addressed. The IRS approved the procedures under section 4945(g)(1), so payments made as proposed would not be taxable expenditures. The letter also states that awards used for qualified tuition and related expenses would not be taxable to recipients under section 117(b).

Ruling snapshot

• Question: Do the proposed four-year fellowship procedures satisfy the advance-approval rules for scholarships under IRC § 4945(g)(1)?
• Outcome: Approved, provided the program operates as described
• Key authorities: IRC §§ 117(a), 117(b), 170(b)(1)(A)(ii), 4945(d)(3), and 4945(g)(1)

Full text (IRS public release)

Department of the Treasury Date: 09/11/2023
Internal Revenue Service
Tax Exempt and Government Entities
P.O. Box 2508
Cincinnati, OH 45201

Taxpayer ID number:

Person to contact:

Name:
ID number:
Release Number: 202349016 Telephone:
Release Date: 12/8/2023
LEGEND UIL: 4945.04-04

C = City
D = Related Party
y dollars = Grant 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 program to award fellowships to high school students and also provide
practical work experience in the C business community. You award fellowships to local high school students in
C in the amount of y dollars per semester for four years. Currently you award one fellowship each year, and
there is no cap on the number of eligible applicants assuming they meet all terms and conditions.

You publicize the fellowship program through the D website and social media accounts. Additionally, you link
to relevant third-party platforms and engage your board and respective networks. Each applicant must be a high
school graduate or a GED recipient, accepted into a four-year university, and have an interest in working in C.
The criteria will be holistically based including applicants' high school GPAs, extracurricular activities,

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

community service, and essay. Awardees will have to maintain at least a 2.5 average on a 4.0 scale and be
enrolled in at least 12 hours of coursework per semester. If they fail to meet these requirements for two
consecutive semesters, they will forfeit remaining fellowship funds. Awardees must also secure an internship(s)
related to the field of government affairs in the C metro area for at least two summers, or at least one academic
year.

Awardees must provide transcripts following each semester confirming academic performance, as well as
discuss their performance with your board (if requested). If the terms of the award are violated, the
consequences can range from warnings and probation to immediate termination of the fellowship award. The
individual may also be asked to repay amounts received during the fellowship period.

Relatives of members of the selection committee, or of your officers, directors, or substantial contributors are
not eligible for awards made under the programs.

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