IRS grants advance approval of a foundation's scholarship-award procedures under 4945(g)(1)

Plain-English summary

When a private foundation gives grants directly to individuals for study, the payments
can be "taxable expenditures" that trigger an excise tax under Section 4945 unless the
IRS approves the foundation's award procedures in advance. Here, a foundation asked for
that advance approval for a scholarship program that helps graduating high school
seniors and non-traditional students in its service area pay for accredited schools.
The program runs five named scholarships, each with criteria such as a minimum 3.0 GPA,
residence in the service area, and an intended field of study, with awards paid directly
to the school for one academic year. The foundation represented that it selects
recipients on an objective and nondiscriminatory basis, bars grants to disqualified
persons and selection committee members' relatives (with committee members recusing on
conflicts), and will keep records, obtain grantee reports, and investigate and recover
any misused funds. The IRS approved the procedures, meaning grants made under them will
be treated as qualifying scholarships under Section 4945(g) and not as taxable
expenditures, and will not be taxable to recipients if used for qualified tuition and
related expenses under Section 117. The approval applies only to this program as
described and does not carry over to significantly different future programs.

Ruling snapshot

• Question: Will the IRS approve in advance a foundation's scholarship-award procedures so its grants to individuals are not taxable expenditures?
• Outcome: Approved (advance approval under § 4945(g)(1))
• Key authorities: IRC § 4945(g); § 117(a), (b); § 170(b)(1)(A)(ii); § 170(c)(2)(B)

Full text (IRS public release)

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 provide financial assistance to graduating high
school seniors and non-traditional students to further their education at an accredited institution described in
Section 170(b)(1)(A)(ii) of the Code. You are seeking advance approval of the scholarship program in
furtherance of your charitable mission to raise funds and award scholarships for the students residing in B
service area. All your scholarships will be for the direct support to the recipients with no repayment obligation.
Scholarship awards will range from q dollars and may be adjusted to account for inflation. You publicize your
scholarship program by posting on your and B’s website and social media. Additionally, you distribute and
display fliers and visuals at B branch locations. You reach out to high school students through in- person
meetings and targeted emails to B members, High school counselors, and community partners who work with
the youth.

In order to be eligible for a scholarship, the applicants must demonstrate that they have been admitted to and
intend to enroll in an educational institution. Applicants must also be members of B. Your scholarship
program awards approximately R different scholarships in five categories to graduating seniors and non-
traditional students. You assume about U youth members are likely graduating per year and eligible to apply
for a scholarship. You receive S applications annually from T members of B. The exact number of
scholarship awards may vary from year to year depending on factors such as funds available and number of
applications received.

Under your scholarship program you offer five different scholarships that include additional requirements:

    1. C Memorial Scholarship
      Applicants must be graduating high school seniors with minimum 3.0 GPA and live in the D. The
      applicants should plan to attend E. Children of C are part of the selection committee for the scholarship
      selection. Since the children of C are part of the selection committee, relatives of the C are not eligible
      for the scholarship. You will select V recipients for the award, annually.
    2. F Memorial Scholarship
      Applicants must be graduating seniors from a high school with a minimum of 3.0 GPA, live within the
      B service area, and plan to pursue a degree in business/accounting. You will select V recipients for the
      award, annually.
    3. G Scholarship
      Applicants must be graduating high school seniors with a minimum 3.0 GPA, live within the B service
      area, and plan to pursue a degree in business, finance, or related studies. You intend to select V
      recipients for the scholarship annually.
    4. J Memorial Scholarship
      Applicants must be graduating high school seniors with a minimum 3.0 GPA, planning to attend an
      accredited college or university in H, and who intend to pursue a degree in accounting, economics,
      business, or related field. You intend to select V recipients for the scholarship annually.
    5. B Scholarship
      Applicants must be graduating high school seniors with a minimum 3.0 GPA, from a high school within
      the B service area. Non-traditional students can apply if they live in the B service area, graduated from
      high school 5 years prior, and are either enrolling at an educational institution for the first time or
      returning after a pause in education. You will select W recipients for this scholarship annually. You
      intend to reserve X of these scholarships to first generation students and X for Career Technical
                                                                                           Letter 4792 (Rev. 1-2022)
                                                                                           Catalog Number 58263T
       Education (CTE) students.

You select recipients based on academic achievement, extracurricular activities, leadership, community
involvement, financial need, and application responses. The applications will be assessed through review of
applicants' responses to essay questions, transcripts, and resumes. Finalists are asked to respond to additional
questions via video submission.

Your selection committee is comprised of the executive director and employees of B. The selection committee
may include community members or foundation board members, as designated by the board or the executive
director. Any person considered to be a disqualified person is not eligible for the awards. To ensure all
scholarship recipients are selected on an objective and nondiscriminatory basis, selection committee members
must disclose familial relationships with applicants and recuse themselves from reviewing their application.
Your executive director is empowered to remove the conflicted selection committee member, if needed.

The scholarships will be for one academic year and be comprised of one-time payment, paid directly to the
educational organization and are non-renewable. If the funds were diverted from their intended purpose or if a
student does not attend the educational institution that the funds were disbursed, you will request return of the
funds from the educational institution. Recipients of the awards are not required to perform any services after
receiving the award.

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