Advance approval of a private foundation's scholarship procedures for economically disadvantaged foreign students under section 4945(g)(1)

Plain-English summary

A private foundation asked the IRS to approve, in advance, the procedures for a
scholarship program funding the education of economically disadvantaged students
in foreign countries, aiming to give them educational opportunities and help them
avoid risks of poverty including modern slavery. Advance approval matters because
a private foundation's grants to individuals for study are normally "taxable
expenditures" subject to an excise tax under § 4945 unless the IRS approves the
procedures first. The foundation awards roughly 20 need-based scholarships at a
time (renewable up to six years), selected by a committee primarily on financial
need with attention to academic performance, distributes funds to the schools,
collects academic reports, and screens recipients against the OFAC sanctions list.
The IRS determined the procedures meet the requirements of § 4945(g)(1), so the
grants will not be taxable expenditures, and it added that the awards are tax-free
scholarships to the recipients to the extent used for qualified tuition and related
expenses under § 117. The approval covers only this program as described.

Ruling snapshot

• Question: Do the foundation's scholarship procedures for disadvantaged foreign students qualify for advance approval under § 4945(g)(1)?
• Outcome: Approved (grants will not be taxable expenditures; awards are tax-free scholarships under § 117 if used for qualified expenses)
• Key authorities: IRC §§ 4945(g)(1), 117(a), (b), 170(b)(1)(A)(ii)

Full text (IRS public release)

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

Release Number: 201840010
Release Date: 10/5/2018 Employer Identification Number:
Date: July 13, 2018

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

X = Country
y dollars = Amount
z dollars = Amount

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 provide in Code Section 117(b)).

Description of your request

You will provide scholarships for economically disadvantaged students in foreign
countries, such as X, to continue their education. You believe that doing so both allows
these young people to pursue educational opportunities and avoid the risks posed by
poverty, including forced modern slavery.

The amount of each scholarship will be approximately y dollars to z dollars. The
approximate number of scholarships awarded and outstanding at any given time will be

20. This amount may increase as program capacity expands.

Letter 4792 (10-2012)
Catalog Number 58263T

You will work to identify eligible populations and directly publicize the opportunities
provided by the scholarship grants to such populations. You have an application form.
You will award scholarships based primarily on financial need, with consideration of the
candidate’s prior academic performance, the successful completion and results of
national exams, the receipt of a diploma from a secondary school, and the responses to
questions on the application.

The scholarships are renewable until the student completes all requirements to receive a
degree, up to a maximum of six years. The opportunity to extend the scholarship further
will be considered if the student is pursuing an advanced degree.

Your selection committee will consist of your President, along with three other qualified
individuals. They will select individual grant recipients and oversee the administration of
the scholarships. Staff shall be responsible for distributing funds to educational
institutions on behalf of eligible recipients and receiving academic reports and grade
transcripts from the recipients.

You will check the OFAC List of Specially Designated Nationals and Blocked Persons for
names of individuals and entities with whom you are dealing to determine if they are
included on the list. You will comply with all statues, executive orders, and regulations
that restrict or prohibit persons from engaging in transactions and dealings with
designated countries, entities, or individuals, or otherwise engaging in activities in
violation of economic sanctions administered by OFAC. If necessary, you will acquire
from OFAC the appropriate license and registration where necessary.

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 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 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.

Letter 4792 (10-2012)
Catalog Number 58263T

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.

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, 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