Advance approval of amended scholarship-grant procedures for a private foundation

Plain-English summary

A private foundation runs a scholarship program and had it approved by the IRS once before. It made three changes and asked the IRS to re-approve its grant-making procedures under Section 4945(g). 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 three changes were: moving to an all-electronic application through a third-party administrator, tightening eligibility (adding a household-income cap, possibly adding dependent grandchildren, and adding management-committee members of a related company), and allowing a scholarship to be renewed up to three times (four years total) if the student keeps a minimum GPA. The IRS approved the amended procedures, finding they meet Section 4945(g)(1), so the foundation's grants won't be taxable expenditures. It also confirmed the awards are tax-free scholarships to recipients to the extent used for qualified tuition and related expenses under Section 117.

Ruling snapshot

• Question: Do the foundation's amended 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. Proc. 76-47

Full text (IRS public release)

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

Number: 202043012
Release Date: 10/23/2020
Employer Identification Number:

Date: July 30, 2020
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
B = Company
C = Date

D = Minimum Grade Point Average
E = Maximum Grade Point Average
x dollars =

Dear

You asked for advance approval of your scholarship grant procedures under
Internal Revenue Code (IRC) 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 IRC 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 IRC Section 117(b)).

Description of your request

You have recently made three changes to your scholarship program previously approved
by the Internal Revenue Service on C.

The first change to the program eliminates the requirement of submitting applications and
attachments via paper. You will now require an all-electronic application submission.
The application process will continue through a third-party administrator.

Letter 4792 (10-2012)
Catalog Number 58263T

The second change to the scholarship program involves eligibility, Specifically, you are
adding an additional eligibility requirement of annual household income equal to or less
than x dollars. In addition, you state your Board of Directors may choose to add the
eligibility of dependent grandchildren. Finally, you are adding to the eligibility selection
any management committee member of B (including all its affiliates and subsidiaries).

The third change to your scholarship program concerns the renewal of scholarships. You
have the option of renewing the scholarship up to three times, resulting in a total of four
years of eligibility. The renewal process is up to three consecutive years or until the
completion of a bachelor’s degree, whichever comes first, on the basis of satisfactory
academic performance (maintaining a minimum grade point average of D on a E scale).

You state in evaluating renewals, an award recipient’s parent or grandparent’s
employment with B or any of its affiliates or subsidiaries, will not be considered.

You indicate the amended scholarship program will meet the 25% Test under Revenue
Procedure 76-47 and Rev. Proc. 80-39.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(IRC 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 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 IRC
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:

Letter 4792 (10-2012)
Catalog Number 58263T

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 IRC 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.

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