Advance approval of a foreign scholarship program for underprivileged students

Plain-English summary

A private foundation asked the IRS to pre-approve the selection procedures for a scholarship program aimed at economically disadvantaged students in a rural area of a foreign country. Advance approval matters because a private foundation that pays a grant to an individual for study normally owes an excise tax on that "taxable expenditure" under Section 4945, unless the IRS has pre-approved objective, nondiscriminatory selection procedures. The program targets students who finished secondary school and passed national university-entrance exams but need funding, with the stated goal of helping them pursue education and avoid risks like trafficking and forced labor. Applicants submit essays, references, academic history, and proof of need, and an independent three-member committee recommends recipients based mainly on financial need, with the foundation making the final choice and excluding insiders and disqualified persons. The foundation pays schools directly, keeps records under Rev. Rul. 56-304, screens recipients against the Treasury OFAC sanctions list, and requires ongoing academic and reporting conditions, with renewals up to six years. The IRS approved the procedures, finding they meet Section 4945(g)(1), so the grants won't be taxable expenditures, and the awards are tax-free to recipients used for qualified tuition and related expenses under Section 117.

Ruling snapshot

• Question: Do the foundation's foreign 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); Rev. Rul. 56-304

Full text (IRS public release)

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

Number: 202043006
Release Date: 10/23/2020
Employer Identification Number:

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

Contact telephone number:

LEGEND UIL: 4945.04-04
Y= Location —

b dollars = Amounts

c = Number

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 provided in Code Section 117(b)).

Description of your request
Your letter indicates you will operate a scholarship program.

Your purpose is to invest in rural projects in Y that improve economic stability and build
community cohesion through educational support as well as through business and
agricultural development.

The purpose of the program is to provide financial support for underprivileged,
economically disadvantaged students in foreign countries specifically Y in order to allow
young people to pursue educational opportunities and avoid the risks posed by poverty
such as forced modern slavery and human trafficking. The scholarships are to be used

Letter 4792 (10-2012)
Catalog Number 58263T

for tuition and fees, school supplies (including books, fees, equipment for courses), and
other related expenses. At first, you expect to grant approximately c renewable
scholarships for b dollars per year. Further, the number of awards will potentially increase
as the program capacity expands.

To promote the scholarship program, you will identify eligible underprivileged populations
and directly publicize the scholarship program to these populations by using public
media, social media and public communications appropriate for rural environments.

To be eligible, candidates must be economically disadvantaged students who have
successfully completed secondary school and national exams for university level study
and require additional funding to complete their studies.

Additionally, eligible candidates will be required to complete an application package with
required attachments including an essay, reference/recommendation letters, academic
history, evidence of need, and a letter of good standing.

Complete application packages will be reviewed and evaluated by a selection committee
consisting of three qualified individuals from Y who are independent of you and have
relevant educational expertise. They will select individual grant recipients on an objective
and non-discriminatory basis and make recommendations to you. You will make the final
selection. Awards will be 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, their essay and the
responses to questions in the application. Moreover, you will not provide scholarships to
members, or staff or their families or to any disqualified person or for a purpose that is
inconsistent with the purposes set forth in IRC Section 170(c)(2)(B).

Your staff will be responsible for distributing funds to educational and financial institutions
on behalf of recipients. Your staff will receive and review reports and grade transcripts
directly from recipients unless circumstances dictate direct interaction with the
educational institutions. Your staff will also investigate diversion of funds from their
intended purposes and take all reasonable and appropriate steps to recover diverted
funds. You will maintain adequate records and case histories showing the name and
address of each recipient pursuant to Revenue Ruling 56-304, 1956-2 C.B. 306.

Before an award is dispersed, you will check the List of Specifically Designated Nationals
and Blocked Persons maintained by the US Department of the Treasury’s Office of
Foreign Assets Control (OFAC) for names of individual recipients to determine if they are
included on the list. You will also comply with all statutes, executive orders, and
regulations that restrict or prohibit persons from engaging in transactions and dealings
with designated individuals, or otherwise engaging in activities in violation of economic
sanctions administered by OFAC.

Letter 4792 (10-2012)
Catalog Number 58263T

To maintain their grant and be considered for renewal, recipients must regularly attend
classes, report grades to you as soon as they are available each academic cycle, open a
personal bank account and share deposit information with you (if required), sign in-
person a monthly deposit affirmation, maintain at least an annual grade point average of
the equivalent to a 3.0 GPA in the US system, attend your required events and
meetings, and provide a copy of a final thesis or project to you. The scholarships are
renewable until the recipient 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 pursues an advanced degree.

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).

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).

Letter 4792 (10-2012)
Catalog Number 58263T

• You should keep adequate records and case histories so that you can substantiate
your grant distributions with the IRS if necessary.

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