IRS grants advance approval of a foundation's scholarship-award procedures for high school students at three schools under 4945(g)(1)

Plain-English summary

A private foundation's grants directly to individuals for study are "taxable
expenditures" subject to an excise tax under Section 4945 unless the IRS approves the
foundation's award procedures in advance. Here, a foundation sought that approval for a
scholarship program open to students currently enrolled at three specified high schools
who have at least a 3.25 GPA and show financial need. Applicants submit essays,
transcripts, evidence of college or trade-school admission, and references; a separate
selection committee for each school (mixing school staff with the foundation's officers)
picks recipients, and relatives of committee members, officers, directors, or
substantial contributors are excluded. Payments go directly to the school, scholarships
can be renewed for up to four years if the student keeps the required GPA, and the
foundation will collect reports and investigate and recover any misused funds. The IRS
approved the procedures under Section 4945(g)(1), so grants made under them are not
taxable expenditures, and awards are not taxable to recipients when used for qualified
tuition and related expenses under Section 117. The approval covers only this program as
described.

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); § 170(b)(1)(A)(ii); § 170(c)(2)(B)

Full text (IRS public release)

To be eligible for a scholarship, the student must be currently enrolled in high school at B, C, or D, and have a
cumulative GPA of 3.25 or better. Applicants will be required to submit an application along with:
  • A personal statement, including their background, family history, short-term and long-term goals, and
    aspirations for furthering their education,
  • Two essays,
  • School transcripts,
  • Evidence of admittance to a college, university, or trade school,
  • Evidence of financial need, which may include FAFSA information
  • References or letters of support.

You will have a selection committee for each of the three schools, B, C, and D. Each selection committee will
have a combination of staff members from the applicable school and your directors or officers. Relatives of
members of the selection committee, or of your officers, directors, or substantial contributors, will not be
eligible for awards.

Selected recipients will meet with one of your representatives designated to review their progress in high school
before enrolling in their college, university, or trade school. Priority will be given to applicants who express
commitment to help future scholarship recipients with mentorship regarding college attendance and career
pursuits after graduation.

Your scholarship recipients will be required to submit a written record after the completion of each semester
establishing that the student has continued to be enrolled and has maintained the required GPA, or, in the case
of a trade program, the equivalent criteria. Scholarships can be renewed up to four years if these criteria are
maintained.

You will make all payments directly to the applicable educational institution on behalf of the student. If your
student fails to maintain the required GPA or equivalent metric the student will receive an initial warning and be
subject to a probation period. A continuing failure to meet the required GPA or equivalent metric may result in
termination of the scholarship for future periods.

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