Advance approval of a private foundation's scholarship procedures

Plain-English summary

A private foundation asked the IRS to pre-approve how it will award college scholarships. This approval matters because a private foundation's grant to an individual for study is normally a "taxable expenditure" that triggers an excise tax under Section 4945, unless the IRS signs off on the foundation's procedures in advance under Section 4945(g). The foundation's program funds graduating high school seniors and current college and technical-school students who live in certain counties, with awards paid directly to their schools for tuition, books, fees, and similar costs. Applicants submit transcripts (minimum 2.5 GPA), an essay, and financial-need information, and a five-person committee selects recipients on objective criteria weighted toward financial need. The foundation also commits to reviewing grantee reports, investigating any misuse of funds, and keeping records. The IRS found these procedures meet the Section 4945(g)(1) requirements and approved them, so the grants will not be taxable expenditures; the scholarships are also tax-free to recipients to the extent used for qualified tuition and related expenses under Section 117. Standard conditions apply (no grants to insiders or their relatives, report significant changes).

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), (g)(1); IRC § 117(a); IRC § 170(b)(1)(A)(ii)

Full text (IRS public release)

        Department of the Treasury      Date: 04/22/2024
        Internal Revenue Service
Tax Exempt and Government Entities      Taxpayer ID number:
                                        Person to contact:
                                        Name:
Release Number: 202429024               ID number:
Release Date: 7/19/2024                 Telephone:

LEGEND
                                        UIL: 4945.04-04
B = Counties
C = State
D = County
E = Number of Grants
x dollars = Dollar Amount

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 to enable graduating high school seniors and
currently enrolled students at two- and four-year universities, colleges, or technical schools further their
education. Your scholarships are limited to students residing in B counties in C who attend or will attend four-
year universities in C or two-year colleges or technical schools in D.

Initially, you will award up to E scholarships, each worth no more than x dollars per year, however, the actual
number and amount of scholarships awarded annually may vary based on your available resources.

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

Scholarships are limited to one academic year and are not renewable, but recipients who meet the eligibility
criteria may reapply if they maintain a minimum GPA of 2.5 on a 4.0 scale. You will advertise your
scholarships through your website and e-mail blasts to local high schools, colleges, and technical schools.

Eligible applicants must submit a completed application form that includes a copy of their most recent transcript
showing an overall GPA of 2.5 on a scale of 4.0 and an essay describing the need for the scholarship and how
they intend to use their education to improve the community. Applicants must also self-report their
standardized test scores and financial need based on family size and total annual income on your application.

Selection criteria will include financial need, extracurricular activities, community service, honors and awards,
leadership abilities, and academic achievement, including class rank, GPA, and standardized test results.
Priority consideration will be given to applicants demonstrating the greatest levels of financial need.

Scholarship applications and supporting documentation will be processed in the order of receipt. Your selection
committee will consist of three members of your board of directors and two members of your advisory
committee who will review the applications and make a decision as to whom will receive your scholarships.

Scholarships will be paid directly to your recipients' schools and applied to the accounts of students currently
enrolled and in good standing with the schools. Scholarships may be used for any of the following expenses:
tuition, books, registration fees, transportation, meal plan supplements, lab fees, and supplies. All scholarship
funds must be used within one academic year.

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 whether 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).

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

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.
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