IRS pre-approves a foundation's medical-school pipeline scholarship program

Plain-English summary

A private foundation asked the IRS to approve, in advance, the procedures for a scholarship program it runs to fund the education of certain qualifying students. Private foundations normally owe an excise tax on grants to individuals, but a grant escapes that tax if the foundation's award procedures are pre-approved by the IRS. The program's goal is to attract undergraduate students from a particular group and school who want to attend medical school, in order to increase the number of those students who become physicians in the United States. The awards blend two parts of the Code: section 4945(g)(1) covers tuition, books, and fees (which are also tax-free to the students if used for qualified tuition and related expenses under section 117(b)), and section 4945(g)(3) covers stipends for living expenses, supplies, and medical-school application and interview costs. Recipients get support for their junior and senior years, must keep a 3.50 GPA and stay enrolled full-time, and the partnering school administers and verifies the payments. The IRS approved the procedures, finding they select recipients on an objective and nondiscriminatory basis, ensure the funds are used as intended, and require reports and recovery of misused funds. As long as the foundation runs the program as described, the grants will not be taxable expenditures under section 4945.

Ruling snapshot

• Question: Do the foundation's scholarship procedures, combining section 4945(g)(1) tuition scholarships and section 4945(g)(3) stipends, qualify for advance approval?
• Outcome: Approved
• Key authorities: IRC §§ 4945(g)(1), 4945(g)(3); IRC § 117(a), (b); Treas. Reg. § 53.4945-4(c)(1); IRC §§ 170(b)(1)(A)(ii), 74(b), 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: 201852021
Release Date: 12/28/2018 Employer Identification Number:

Date: October 4, 2018
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
B = Name

C = Demographic

D = School

E = School Office

F = Number

t dollars = Amount
u 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 Sections
4945(g)(1) and 4945(g)(3). As a result, expenditures you make under these procedures
won't be taxable.

Also, Section 4945(g)(1) scholarships made under these procedures are scholarships
that 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 an educational scholarship program called B. The
purpose of B is to provide scholarships to attract C undergraduate students from D who
wish to attend medical school after graduation to increase the number of C students who
become medical doctors in the United States. Under B, you will make distributions which
have components of both Internal Revenue Code Sections 4945(g)(1) and 4945(g)(3).

Expenses under Code Section 4945(g)(1) may include tuition, books and school fees.
Expenses under Code Section 4945(g)(3) may include a stipend to cover living
expenses, supplies and equipment, medical school application fees, and medical school
interview expenses related to travel, hotels, meals, and so forth.

Under B, you will provide grants for the recipients' third (junior) and fourth (senior)
academic years of undergraduate study subject to the recipients maintaining the
continuing eligibility requirements. You will disseminate information on B on D's website.

To be eligible for a grant under B, applicants must:

Be a C sophomore enrolled as a full-time student at D at the time they apply;
Have maintained a minimum 3.50 grade point average (GPA) in all their
coursework;

Have completed or enrolled in during the second semester of their sophomore
year four of six specific pre-requisite courses;

Show financial need with their education costs;

Be registered with E and completed at least one half of E's workshops;

Have completed a one-to-one assessment meeting with E.

In addition, all applicants must submit a completed scholarship application by a specific
due date, which must include the following:

• All college transcripts from D and any other post-secondary institutions as
well as a college coursework plan;
Lists of all scholarships and grants;
E Advising Record;
A personal statement.

The scholarships are awarded on an objective and non-discriminatory basis by a
selection committee initially consisting of several individuals. The majority will be
administrative and academic professionals who represent D. There will also be a
representative of yours as well as practicing physicians who have completed the
premedical program at D on the selection committee.

Your selection committee will select the recipients from among the eligible applicants

based on prior academic performance, financial need, recorded demonstration of

consistent and timely engagement with E, evaluation of the personal statement and other

supporting materials, completion of prerequisite courses, and an interview with the
selection committee. Preference will be given to those applicants who have
demonstrated engagement with E beyond the minimum requirements as well as to
applicants who have completed prerequisite courses above the minimum amount
required. Scholarships will not be awarded to any disqualified person, employee or

relative of any employee of yours or to any member of the selection committee or relative

of any such member.

You plan to initially award F scholarships. Each scholarship recipient will receive t dollars
for their last two years of undergraduate study with one half to be paid per academic
year, subject to the recipient maintaining the continuing eligibility.

You will transfer all amounts to fund the scholarship grants to D who will administer
payment of the scholarships. In addition, D will verify continuing eligibility prior to the
disbursement of any scholarship funds. The scholarships will be paid in installments of u
dollars for each semester for tuition. The remainder will be distributed in equal monthly
stipends during the academic year to the recipient. The monthly stipends may be used for
various expenses incurred while attending D such as living expenses, books, supplies
and equipment for courses, and expenses associated with applying to medical school.
These may consist of MCAT fees, MCAT study fees, medical school application fees, and
medical school interview expenses related to travel. D will not distribute or apply funds to
or on behalf of a recipient who has ceased to meet the continuing eligibility requirements.

To be eligible for the second-year disbursement, a recipient must be enrolled full time, at
least 12 credit hours per semester, and the recipient must maintain a 3.50 GPA for all
course work at D and for any transfer credit. Recipients may not interrupt nor pause
their full-time enrollment at D. A recipient's failure to maintain full-time enrollment for
consecutive semesters of the two academic years will result in termination of the
scholarship. If your selection committee determines that a recipient is no longer eligible
for the scholarship, then no further scholarship payments will be made to that recipient.
There will be no re-admittance or regaining of eligibility after termination.

You will distribute scholarship funds the same way in the second academic year as you
did in the first one. Depending on B's success, you may allocate additional funds to B in
future years.

You will monitor compliance with the scholarship program and you will receive
documentation verifying that each of the recipients continues to be eligible to receive
scholarship payments. Furthermore, while the monthly stipends are distributed by D, the
recipients will be required to submit a report to D containing the information required
under the regulations to insure the expenses meet your criteria. D will provide these
reports to you.

Moreover, each recipient will be required to pay to D an amount equal to the amount of
the monthly stipends used for expenses that are not permissible or are not expended
prior to the end of their fourth academic year at D. In the event a recipient fails to submit
a report timely or does not use the funds for the purposes permitted under the terms of
the scholarship, you will conduct an investigation, take all reasonable appropriate steps
to recover any funds that were used for an improper purpose, and withhold further
payments to the recipient in accordance with the regulations.

You represent that you will maintain the following: (1) 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 purpose 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.

• The grant is:

• A scholarship or fellowship subject to Section 117(a) and is to be used for
  study at an educational organization described in Section 170(b)(1)(A)(ii); or

• A prize or award subject to the provisions of Section 74(b), if the recipient of
  the prize or award is selected from the general public; or

• To achieve a specific objective; produce a report or similar product; or
  improve or enhance a literary, artistic, musical, scientific, teaching, or other
  similar skill or talent of the recipient.

Under 4945(g)(3), to receive approval of its educational grant procedures, Treasury
Regulations Section 53.4945-4(c)(1) requires that a private foundation show:

• The grant procedure includes an objective and nondiscriminatory selection
process.

• The grant procedure results in the recipients performing the activities the grants
were intended to finance.

• The foundation plans to obtain reports to determine whether the recipients have
performed the activities that the grants were intended to finance.

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

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements