Advance approval of a foundation's tuition scholarship procedures for students abroad

Plain-English summary

A private foundation asked the IRS to pre-approve how it will select and pay scholarships. A private foundation that gives individuals money for study normally owes an excise tax under Section 4945 unless the IRS approves its grant procedures in advance under Section 4945(g). This foundation pays primary school, secondary school, and college tuition (plus required books and related costs) for children in a specific area abroad, choosing recipients on academic performance and financial need, with the greatest share going to secondary school students. Payments go directly to the schools, recipients must keep passing grades and file reports to renew, and relatives of insiders are excluded. The IRS found these procedures objective and nondiscriminatory and approved them. As a result, the foundation's grants will not be taxable expenditures, and the awards are tax-free scholarships to recipients who use them for qualified tuition and related expenses (subject to Section 117(b)). The approval applies only to this foundation and only if its facts and procedures do not change significantly.

Ruling snapshot

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

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
P.O. Box 2508                                                Taxpayer ID number:
Cincinnati, OH 45201

Date: 03/21/2024

                                                             Person to contact:
                                                             Name:
                                                             ID number:
Release Number: 202424024                                    Telephone:
Release Date: 6/14/2024
LEGEND                                                       UIL: 4945.04-04

B = Person
C = City
D = Country
b = dollar range
c = dollar range
d = dollar amount
e = dollar amount
f = number
g = price
h = number

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
[illegible].

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

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

Your letter indicates you will operate a grant making program. Scholarships are provided to individuals for the
purpose of paying for those individuals' primary school tuition, secondary school tuition or college tuition,
including the cost of required books and related educational expenses. Scholarships will be granted for either a
single term or a single year at a time and may be renewed. Based on need and available scholarship funds, h to
j new scholarships will be awarded annually. The program is generally publicized through direct contact with
the schools. Grant amounts range from b dollars per term for primary school fees, c dollars per year for
secondary school fees, approximately d dollars per year for secondary boarding school fees and approximately e
dollars per year for university fees. The amount of the scholarships may change over time due to gradual
increases in tuition cost and the variance between the difference school's tuitions. A greater proportion of
scholarships awarded each year are expected to be for secondary school. There will not be educational loans.

Eligibility in the program will be limited to B children who:

- Are enrolled in or have graduated from public and private primary or secondary school in C and its
immediately counties and have received acceptance to a primary school, secondary school or college,
respectively

- Have submitted an application for the scholarship or have had an application submitted on their behalf

- Have scored an above average score on the D's Certificate of Primary Education (a score equal to or greater
than f) or, for children still enrolled in primary school, are living in extreme poverty as verified in-person by an
agent
(currently g dollars per person each day)

Scholarship recipients will be selected based on the following criteria:

- A greater score on D's Certificate of Primary Education
- The extremity of financial need as determined by income
- Contributing factors like additional scholarly aptitude or hardship documented in the scholarship application
- Equitable allocation among the primary and secondary schools from which applicants are received

Scholarship recipients cannot be related to a member of the selection committee, your directors or any other of
your disqualified persons.

To maintain a scholarship, the grantee must submit all required reports, sustain enrollment in their school and
receive passing grades in each of their classes. Students who meet scholarship maintenance requirements may
request renewal of the scholarship for the following school year. Scholarships for primary school cannot extend
beyond one school year. Renewals will be granted on continued financial need and the students' academic
performance.

Each grantee must submit a copy of his or her grade report for each term along with a report describing the
grantee's performance in school and plans for improvement in the case that performance is below average or
lower than the grantee expected. Scholarships will be paid directly to the grantee's school and schools will be
requested to withhold the expenditure of any scholarship for students who are no longer enrolled or who are not
passing all of their classes.

If no report is filed by the grantee, or if the report shows that the student is not maintaining passing grades, or if
the report indicates that the funds are not being used in furtherance of the scholarship purpose, a member of the
Board of Directors will investigate. While conducting this investigation, further payments on behalf of the
grantee will be withheld, and reasonable steps will be taken to recover grant funds until it has been determined
that the funds are being used for their intended exempt purpose.

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

Your directors will determine the selection committee. No member of the selection committee will be in a
position to receive private benefit, directly or indirectly.

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.

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