Advance approval of a foundation's art-scholarship grant procedures

Plain-English summary

A private foundation runs a scholarship program for graduating seniors at one local high school who have shown a commitment to the arts, paying tuition directly to the college where they study art. Before a private foundation makes grants to individuals, it must get the IRS to approve its selection procedures in advance, or the grants count as "taxable expenditures" that trigger excise tax. The foundation described its process: publicized scholarships, applications with an essay, artwork samples, grades, and counselor recommendations, selection by a committee of board members based on merit and financial need, a bar on grants to insiders and their relatives, and recordkeeping and follow-up on how funds are used. The IRS approved the procedures, finding they meet the objective-and-nondiscriminatory standard of Section 4945(g)(1). As a result, the foundation's grants under this program are not taxable expenditures, and the scholarships are tax-free to the students to the extent used for qualified tuition and related expenses under Section 117. The approval covers only this program and future ones that do not differ significantly.

Ruling snapshot

• Question: Do the foundation's scholarship selection procedures qualify for advance approval under Section 4945(g)(1)?
• Outcome: approved
• Key authorities: IRC § 4945(g)(1); IRC § 117(a), (b); IRC § 170(b)(1)(A)(ii)

Full text (IRS public release)

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

Number: 202034006
Release Date: 8/21/2020
Employer Identification Number:

Date: May 28, 2020
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
X = Name
Y = City, State

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 operate a scholarship program offering scholarships to local high school seniors
from X High School, located in Y. You seek students who have demonstrated a
commitment to the arts in their lives and in the classroom.

The scholarships will be in the amount of z dollars per student, for the study of art at a
college or other institution of higher learning. All tuition payments are made directly to the
educational institution. The scholarships are publicized at X High School and in the local
media. .

Letter 4792 (10-2012)
Catalog Number 58263T

Applications are made to the high school scholarship committee. This consists of a 500-
word essay describing the importance and impact of the arts on the world and in their
own lives, samples of their artwork, and information on their grades. Also, the candidates
are vetted by the school counselors.

Selection is based upon the student’s essay, their grades, their recommendation from the
high school counselors, their personal interview, and their financial need. The number
and amount of grants is determined based upon your available funds, and on the
candidate pool that year. The number and amount of grants is determined by the board
and could change from year to year. The grants are one-time grants, but that doesn’t
prevent a scholarship recipient from reapplying for a subsequent year.

The selection committee is looking for students who have a talent and demonstrated a
commitment to the arts, who have a high grade point average, and who have a financial
need. Students’ academic performance is tracked by the committee.

The selection committee is made up of board members. Relatives of board members are
not eligible for scholarships.

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 the 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 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 the 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).

Letter 4792 (10-2012)
Catalog Number 58263T

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.

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