IRS approves regional-study scholarship and grant procedures

Plain-English summary

A private foundation proposed scholarships for qualifying students and grants for projects focused on two redacted geographic regions. Applicants would be selected using objective criteria, insiders and their relatives would be excluded, and recipients would have reporting requirements. The foundation also proposed monitoring grant use, withholding further payments during investigations, and taking reasonable steps to recover misused funds. The IRS approved the procedures under sections 4945(g)(1) and 4945(g)(3), so expenditures made under the procedures would not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation's scholarship and project-grant procedures satisfy the advance-approval requirements of section 4945(g)?
• Outcome: approved
• Key authorities: IRC §§ 74(b), 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

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


Number: 202011011                                 Employer Identification Number:
Release Date: 3/13/2020
                                                  Contact person - ID number:

Date: December 18, 2019                           Contact telephone number:




LEGEND:                                           UIL:
B = geographic region 1                           4945.04-04
C = geographic region 2
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 and educational grants. Based
on the information you submitted, and assuming you will conduct your program as
proposed, we determined that your procedures for awarding scholarships and
educational grants 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, 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 make scholarships and grants to individuals to study (i) current political, cultural,
and economic issue in the B, (ii) the challenges facing the B and possible strategies to
alleviate such challenges, (iii) the C, its cultural identity, and its future, or (iv) the
interrelations of the                                       in the B. While the criteria and
selection will be very similar funds will be distributed to applicants based on whether they
are applying for a scholarship or grant dependent on the relevant section under IRC
4945(g).

The purpose of your programs are to (1) improve greater understanding of the B and the
C; (2) to develop coordination, and hopefully improve dialogue among the religions of the
B; and (3) to identify and develop possible strategies to resolve the challenges of the B.
The funds awarded will be for educational expenses and/or the specific product or
objective the recipient is trying to achieve. The amount of each award will depend on
available funds and the strength of potential grant recipients' applications. These awards
can be renewed up to two years.

You will publicize your awards on your website, at high schools that offer courses on any
of the languages spoken in the C, at colleges, and universities that offer degrees in
international affairs or relations, and at government and nonprofit institutions that promote
a better understanding of the B or C. Applicants must submit an application and include
documentation of their scholastic and academic achievements, reasons for pursuing a
degree in international affairs or similar program, participation in past programs or
courses relating to the B or C and a detailed essay discussing their reasons for studying
about the B or C. Additionally, for the financially needy recipients, they must demonstrate
that their total family income is below z dollars, by providing tax-returns, monthly income
statements and/or other documents to indicate their income status.

Your selection committee will be your board of directors. You will make awards based on
an objective and nondiscriminatory basis. Relatives of members of the selection
committee or of your officers, directors or substantial contributors will not be eligible to
receive scholarships. The selection committee will award each scholarship using
objective criteria including prior academic performance; performance on tests designed to
measure fitness ability and aptitude for various levels of scholastic study;
recommendations from teachers and/or community leaders; financial need; and
conclusions which your selection committee might draw from a personal interview with
the student, his or her parents, teachers and/or mentors.

The criteria for the grant program includes a written proposal that (1) details how the
recipient would use the grant, (2) provides a budget for the project, product, paper,
artwork, etc. that will be produced by the grantee, and (3) describes how the project,
product, etc. furthers your charitable purpose and is related to the B or C. The selection
committee may examine other facts and circumstances such as personal characteristics
like motivation, character, and potential that may be evidenced by a personal interview.
The terms and conditions that apply to all grant recipients require that grant recipients:
(i) execute a commitment letter; (ii) provide progress reports, including report cards or
transcripts for scholarship recipients; and (iii) submit an annual report describing how the
grant was used, attaching any papers, publications, or presentations that the recipient
produced which is associated with the grant's subject matter, or including grade
transcripts, if applicable, and providing receipts for expenses paid for by the grant.

You will maintain case histories of all grant receipts. These case histories will include
names, addresses, study category, financial need, amount of each award, scholastic
history, and manner of selection. Further, the case histories will include a copy of the
commitment letter that each grant recipient must sign. You will also design forms to track
the scholastic progress of recipients. You will require any participating university to
maintain progress reports and track the recipient's academic record, and will require
report cards and/or grade transcripts from all its participants in the scholarship program.

In most cases, you will distribute funds directly to the student's respective college or
university for use towards tuition or similar educational costs. In rare cases, you will
make a payment directly to the student but will do so in accordance with the rules of
Internal Revenue Code Section 4945.

You will monitor closely the performance of participants by requiring that each
scholarship recipient and his or her respective participating college or university submit a
progress report at the end of each semester. Students who fail to submit such documents
may become ineligible to receive additional monies or renewal scholarships.

In situations where you learn that any or the entire grant is not being used in furtherance
of its purposes, you will investigate and will withhold further payments while investigating.
You will take all reasonable and appropriate steps to recover any awards that it
determines have been used for improper purposes.

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 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.

   •       The grant is to be used for study at an educational organization described in Code
           Section 170(b)(1)(A)(ii).

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 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