IRS pre-approves a foundation's scholarship program for civic-leadership students

Plain-English summary

A private foundation asked the IRS to approve, in advance, its
procedures for awarding college scholarships. The program funds the full
cost of attendance for high school students who have completed a
particular civic-engagement or STEM course and go on to a college that
offers the same course, selecting recipients on financial need, academic
record, and commitment to philanthropy and civic leadership. Private
foundations normally owe an excise tax under Code § 4945 on grants to
individuals for study, but § 4945(g)(1) exempts scholarship grants if
the IRS approves the award procedures in advance. The IRS found the
foundation's objective, nondiscriminatory selection process, its use of
a qualified scholarship committee, and its reporting and fund-recovery
safeguards satisfy § 4945(g)(1), so grants under the program will not be
taxable expenditures. The letter also confirms the scholarships are not
taxable income to recipients who use them for qualified tuition and
related expenses under § 117. This matters to foundations running
scholarship programs that want to avoid the § 4945 excise tax.

Ruling snapshot

• Question: Do the foundation's scholarship-award procedures qualify
  for advance approval under § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC § 4945(g)(1); IRC § 117(a), (b); IRC
  § 170(b)(1)(A)(ii), § 170(c)(2)(B); IRC §§ 4946, 507(d)(2)

Full text (IRS public release)

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

Date: September 15, 2020

Number: 202050019
Release Date: 12/11/2020

Employer Identification Number:
Contact person - ID number:
Contact telephone number:

LEGEND UIL: 4945.04-04

T = University
U = University
V = University
W = Program
X = Course
Y = Foundation
Z = Foundation

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

Your letter indicates you will operate a scholarship program named W. The purpose of W
is to encourage young people with a demonstrated passion for civic engagement and
community leadership to continue these pursuits at a college or university with a
undergraduate class (or its equivalent) in X. You have primarily achieved your charitable
mission by developing and supporting X course offerings at various colleges and
universities across the country. You have partnered with two public charities, Y and Z, as
a first step in expanding the reach of the program.

You worked with Y to develop the X course offering, which aims to inspire and prepare
students to pursue STEM (science, technology, engineering, and mathematics) majors at
top-tier universities and become future leaders in their fields. Similarly, you have worked
with Z, who sponsors a comparable program for students who have demonstrated high
academic potential but have financial or other constraints that might limit their educational
opportunities.

As a part of your mission to expand the program, you are establishing this new
scholarship program, W, to support those young people who have participated in the X
course, or equivalent programs, who demonstrate the potential to be skilled
philanthropists and civic leaders to allow them to continue these pursuits at certain
colleges or universities, T, U, V, or others in the future, who all offer the X course.

Through W, you will provide the full cost of attendance at a college or university for a high
school student who has completed an X class (or its equivalent) at the secondary school
level and who will attend a college or university that is in close proximity to the community
in which the applicant resides that offers or that you believe will offer an X class at the
undergraduate level.

The scholarship program will be publicized through the X class (or its equivalent) at the
secondary school level sponsored by you. The application materials will be available on
your website(s) and you will encourage X instructors to personally reach out to potential
applicants and encourage them to apply for the scholarship. Initially, you plan on offering
at least one scholarship annually.

To be eligible for the scholarship program the applicant must:

• Be a current high school senior or recent high school graduate who has completed
the X class (or its equivalent) at the secondary school level.

• Have been accepted to a local college or university that offers the X class (or its
equivalent) prior to applying for the scholarship.

• Demonstrate a strong commitment to social change and an in pursuing the
intersection of philanthropy, business, and civic engagement personally or
professionally after completing an undergraduate degree.

• Have a 3.5 Grade Point Average ("GPA") on a standard 4.0 scale (or its
equivalent) at his or her respective secondary school.

• Provide evidence of financial need.

• Agree to take the X class (or its equivalent) at their respective college or
university.

Each applicant will be interviewed by the selection committee and will be required to
submit an application form, a high school transcript showing courses completed with
GPA, responses to essay questions, and two letters of reference.

The scholarship committee members will be appointed by your board of directors based
on recommendations from your partners in academia as well as other trusted community
leaders. To serve as a member of the committee a prospective member will have met
one or more of the following criteria:
• Must be a current or former educator who has created and offered a X class and is
familiar with the W program.
• Familiarity or affiliation with one or more of the colleges and/or universities to
which prospective grantees have been accepted and at which the X class
(or its equivalent) is offered.
• Must be a civic leader in philanthropy, particularly those civic leaders in
philanthropy who reside in the communities, in which, the scholarships are offered.

Members of the scholarship committee may resign at any time. And members of the
scholarship committee can be removed from the committee at the discretion of your
board of directors. Your manager, as defined in Code Section 4946 and substantial
contributors, as defined in Code Section 507(d)(2), are not eligible to serve on your
scholarship committee.

Grantees will be selected on an objective and nondiscriminatory basis by the scholarship
committee. Relatives of the members of the scholarship committee or "disqualified
persons", as defined in Code Section 4946, shall not be eligible for the scholarship.

The scholarship committee will consider the following factors in selecting a recipient from
amongst the pool of applicants:
• Financial need
• Prior academic performance, and
• Motivation, character, ability and interest in philanthropic pursuits and civic
engagement.

Before you renew the grant, each semester you will require the following items from the
grantee:
• Proof of continued enrollment at the college/university
• Proof of GPA
• Evidence of financial need
• A statement of reflection from the grantee which describes their college/university
experiences and its impact on their continued commitment to social change and
interest in pursuing the intersection of philanthropy, business, and civic
engagement, and
• And at the end of a grantee's third year of study, the grantee must provide proof
that the X class (or its equivalent) has been completed.

You will make grants directly to the college or university the recipient is attending,
following verification of their enrollment for the ensuing academic year. And to prevent
any improper use of grant funds, you will:

• Require each grantee to submit an annual report to you. The report will list the
grantee's courses of study and describe how the grant funds furthered your
mission.

• If any diversions of funds from their intended purposes occurs, you will investigate.

• If your investigation determines that a diversion of funds occurred, you will take all
reasonable and appropriate steps to recover the diverted funds. Any further
payment made to the grant recipient(s) will be withheld until you obtain the
grantees' assurances that future diversions will not occur, and that the grantee(s)
will take extraordinary precautions to prevent future diversions from occurring.

You will maintain all records relating to individual grants, including information obtained to
evaluate grantees, an assessment of whether a grantee is a disqualified person, the
amount and purpose of each grant, and a record of the efforts you undertook to ensure
that all grant funds are used for their intended 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 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).

• 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

Letter 4792 (10-2012)
Catalog Number 58263T