Foundation's health-care scholarship procedures approved under 4945(g)(1)

Plain-English summary

A private foundation runs a scholarship program for local residents pursuing health-care degrees or certifications at nearby schools, and asked the IRS to approve how it selects recipients. Private foundations owe an excise tax on grants to individuals for study unless the IRS pre-approves the selection procedure under IRC Section 4945(g). The foundation described merit-and-need-based awards (minimum 3.0 GPA, enrollment in a health-care program), judged by per-school selection committees on objective, nondiscriminatory criteria, with money paid directly to the institution and reporting safeguards in place. The IRS found the procedures meet Section 4945(g)(1), so the grants are not taxable expenditures, and the awards are tax-free scholarships to recipients when used for qualified tuition under Section 117(b). The practical result: the foundation can fund these scholarships without triggering the 4945 tax, provided it runs the program as described.

Ruling snapshot

• Question: Do the foundation's health-care scholarship procedures qualify for advance approval under IRC § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC § 4945(g); IRC §§ 117(a), 117(b), 170(b)(1)(A)(ii), 170(c)(2)(B)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201836010
Release Date: 9/7/2018 Employer Identification Number:
Date: June 13, 2018

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

F = Name

G = Number

H = Numbers

x dollars = Amounts

Dear

You asked for advance approval of your scholarship grant procedures under
Internal Revenue Code Section 4945(g). This approval is required because you are
a private foundation that is exempt from federal income tax. You requested
approval of your scholarship program to fund the education of certain qualifying
students.

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 Code Section 4945(g)(1). As a result, expenditures you make under these
procedures won't be taxable.

Also, 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 Code Section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program. The purpose of the program
is to award scholarships for post-secondary education related to health care to residents
of F to attend one of G local educational institutions which have health care majors.
Scholarships are to be used for tuition, books, fees, or equipment needed for course work
to complete a degree or certification program in a healthcare field. Furthermore, you will
annually award an average of H non-renewable scholarships for amounts in the range of

x dollars. Your intent is for these awards to be used to reduce student obligations or
loans rather than reducing scholarships or grants given by the educational institutions.

To be eligible to apply for a scholarship, applicants must be residents of F and have a
cumulative grade point average of at least 3.0 or better as well as be enrolled in a degree
or certificate program in the health care field.

To apply for the scholarships, applicants must complete your application form which can
be obtained from the G educational institutions in F offering healthcare majors. The
applications must be submitted by a specific date along with two letters of
recommendation, a short essay and an Official transcript from the current or most recent
school to the scholarship office of their educational institution.

You will annually appoint a selection committee for each local educational institution after
you receive basic information from volunteers about their interests and qualifications.

Each selection committee at the local educational institutions will evaluate and rank the
applications from their respective institution using objective and nondiscriminatory criteria
including (but are not limited to) prior academic performance, the college major, the
school attended or attending, the city of residence, the performance on a test designed to
measure ability and aptitude for college work, recommendations, financial need as well
as conclusions that the selection committees might draw from a personal interview or
written materials as to the individual's motivation, character, ability, and potential. The
selection committees will then forward the top one or two applications to you for the final
review and approval.

You will pay scholarships directly to the educational institution with a letter advising the
school that the funds may be used for any educational expenses included in the cost of
attending said institution. Recipients must be enrolled at least three fourths of the time in
the term following the award to receive it.

For all of your programs, you represent you will complete the following: (1) arrange to
receive and review grantee reports annually and upon completion of the purpose for
which the grant was awarded, (2) investigate diversion of funds from their intended
purposes, (3) take all reasonable and appropriate steps to recover the diverted funds,
ensure other grant funds held by a grantee are used for their intended purposes, and (4)
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 diversions from occurring.

You represent that you will: (1) maintain all records relating to individual grants including
information obtained to evaluate grantees, (2) identify whether a grantee is a disqualified
person, (3) establish the amount and purposes of each grant, and (4) establish that you
undertook the supervision and investigation of grants described above.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(Code Section 4945). 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 of the following requirements of Code 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 Code Section
117(a).

• The grant is to be used for study at an educational organization described in Code
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 Cincinnati Office of Exempt Organizations at:

Internal Revenue Service

Exempt Organizations Determinations
P.O. Box 2508

Cincinnati, OH 45201

You cannot 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 Code 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.

Please keep a copy of this letter in your records.

If you have questions, please contact the person listed at the top of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T