IRS approves a private foundation's scholarship procedures for a global math and science video competition

Plain-English summary

A private foundation runs an annual global competition for high school students,
asking them to make a short video that teaches a difficult math or science
concept in an engaging way. It asked the IRS to bless the way it picks and pays
scholarship winners. Because private foundations owe an excise tax on "taxable
expenditures," and grants to individuals for study count as taxable expenditures
unless the IRS approves the award procedures in advance, this sign-off matters:
it keeps the foundation off the hook for the tax. The IRS approved the
procedures under Code Section 4945(g)(1), finding the awards are made on an
objective, nondiscriminatory basis through a multi-round judging process. The
grants are also treated as tax-free scholarships to the recipients under Section
117 as long as the money goes to qualified tuition and related expenses.

Ruling snapshot

• Question: Do the foundation's scholarship award procedures qualify for advance approval under IRC § 4945(g)(1) so the grants are not taxable expenditures?
• Outcome: Approved
• Key authorities: IRC § 4945(g)(1); IRC § 117; IRC § 170(b)(1)(A)(ii); IRC § 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: 201846009
Release Date: 11/16/2018

Employer Identification Number:

Date: August 20, 2018
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
b = Number
c = Number
m dollars = Dollar Amount
n dollars = Dollar Amount
X = Program Name
Z = Company Name

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

Your letter indicates you will operate a scholarship program called X. X is an annual
global competition for high school students to inspire creative thinking in the fields of
math and science. Your purpose is to further the mission of honoring outstanding
achievements in learning.

You will directly administer X and award scholarships directly to the winners.

Letter 4792 (10-2012)
Catalog Number 58263T

To apply for X, students will create submissions following application guidelines. The
application will have two sections, the primary challenge and additional questions. The
primary challenge is to choose a concept or theory that is important but challenging and
create a short video to teach the concept in an engaging, imaginative way. The additional
questions are questions about how they choose the video topic, why they want to study
math or science, and what they want to study in the future. Applicants will also be
required to participate in peer-to-peer scoring of fellow students' submissions.

To be eligible, students must be between the ages of b and c. Everyone who meets age
requirements is eligible to submit an application. The only exceptions are students
located in countries prohibited from trade relations with the United States or discretionary
decisions based on local laws or ordinances. Relatives of members of the Academic
Judging Panel, the Selection Committee, or the officers, directors, and substantial
contributors of or to you are not eligible to participate in X.

You publicize X on your website, and through other organization with an interest in
science and education.

To ensure that scholarships are awarded in an objective and nondiscriminatory manner,
submissions in the X will be judged by student peers, educators and leaders. Judging
will consist of six phases:

1. Peer-to-Peer review by student participants. The top ranking submissions will be
   forwarded to Judges.

2. Independent Academic Judging by educators selected and appointed by you. The
   highest ranked submissions in this round will be designated as semi-finalists.

3. Verification of Semi-Finalists' entries comply with X rules.

4. Public Voting on Semi-Finalists Videos via website. The highest ranking
   submission as voted by the public may be added as a sixth finalist, if not already a
   finalist.

5. A Selection Committee chosen by you and comprised of educational experts will
   review and score the highest-ranking semi-finalists and select finalists.

6. The Selection Committee will review each finalist and each member will rank the
   finalists. Your Chairman will make the final determination of X's winner. They will
   also select regional finalists.

You will award one scholarship to the winner of X of m dollars. You will award additional
scholarships to regional finalists of n dollars. The number and amount of scholarships
could vary depending in the future.

You will not award renewals of grants. However, grants may be paid over a period of
years on behalf of enrolled students in good standing at a qualified higher institution of
education.

Letter 4792 (10-2012)
Catalog Number 58263T

You will also employ other measures to supervise the awards and act if the terms of the
awards are violated.

• Funds will be paid directly to the recipients' colleges or other institution of higher
  education.

• Funds may only be used for tuition and fees at an accredited post-secondary
  educational institution or non-U.S. equivalent.

• Non-U.S. equivalent institutions must not be subject to sanctions through the U.S.
  Dept. of Treasury, Office of Foreign Assets Control.

Funds must be used within 8 years of graduation from secondary school.

• Scholarship funds are not assignable to any other student in whole or part and any
  unused portion must be returned to you.

• Any student who fails to maintain academic good standing is ineligible for a
  renewal scholarship for the subsequent year.

You will engage a scholarship management organization, Z, to administer the
scholarships. Z will perform the following:

• Corresponding with recipients and/or their representatives and how to access
  funds

• Maintaining records and contact information with recipients

• Confirming high school graduation and enrollment in post-secondary educational
  institution

• Distributing scholarship fund payments

• Providing relevant tax information and forms to recipients in the United States and
  Canada, and

• Any other communication with the recipient's representative in connection with the
  management of the scholarship.

You represent that 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 maintain all records related to the following: (1) individual
grants including information to evaluate grantees, (2) grantees which are identified as a
disqualified person, (3) how the amount and purpose of each grant was established, and
(4) how you established 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

Letter 4792 (10-2012)
Catalog Number 58263T

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.

We've sent a copy of this letter to your representatives as indicated in your power of
attorney.

Please keep a copy of this letter in your records.

Letter 4792 (10-2012)
Catalog Number 58263T

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

Sincerely,

Steve A Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T