IRS approves a private foundation's scholarship and individual grant procedures

Plain-English summary

A private foundation requested advance approval for two programs that make grants to individuals. One program provides scholarships and fellowships for undergraduate or graduate study, while the other supports recipients pursuing specific objectives or developing skills and talents, including environmentally sustainable business practices. The foundation proposed objective selection criteria, excluded disqualified persons, required reports, and established procedures to investigate misuse and recover diverted funds. The IRS approved the procedures under IRC §§ 4945(g)(1) and 4945(g)(3), so grants made under them will not be taxable expenditures if the programs operate as described. Scholarship amounts used for qualified tuition and related expenses also may be excluded from recipients' income within the limits of IRC § 117(b).

Ruling snapshot

• Question: Do the foundation's scholarship and individual achievement-grant procedures satisfy the advance-approval rules for grants to individuals?
• Outcome: Approved.
• Key authorities: IRC §§ 74(b), 117, 170(b)(1)(A)(ii), 4945(g), and 4946(a); Treas. Reg. § 53.4945-4(c).

Full text (IRS public release)

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

                                              Employer Identification Number:

Date: September 29, 2020
Contact person - ID number:

Number: 202052051
Release Date: 12/24/2020 Contact telephone number:

                                              UIL:
                                              4945.04-04

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 under 4945(g)(1)
You will implement an individual grantmaking program in furtherance of your charitable
purposes to award scholarship or fellowship grants to students enrolled in undergraduate
or graduate programs at educational institutions described in Section 170(b)(l)(A)(ii).

Potential recipients will generally be required to submit an application that includes
information regarding financial need; a short biographical statement; a description of the
specific objective, skill, or course of study for which the grant is being sought; information
required for you to ensure that the potential grantee is not a disqualified person with
respect to you within the meaning of Section 4946(a); proof of enrollment or admission;
and transcripts for all completed terms in any program of secondary or postsecondary

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education and proof of enrollment or admission in the program for which funds are being
sought. You will also, as a general matter, request that grant applicants submit one or
more letters of support and provide references.

Your grantmaking procedures define eligible grantees for Section 4945(g)(1) scholarship
or fellowship grants as any U.S. citizens or legal residents who are enrolled in an
undergraduate or graduate program at an institution of higher education described in
Section 170(b)(l)(A)(ii) or scheduled to enroll in such a program in the immediately
following academic year.

You will select all grant recipients in accordance with your grantmaking procedures. As
stated in these procedures, your selection criteria are intended to identify those
individuals who have the greatest need for your assistance, a demonstrated ability to
further your tax-exempt purposes, and/or who show strong potential to succeed. This
selection criteria includes financial need; prior academic performance; recommendations
from instructors and/or from college access programs; and an evaluation of the
applicant’s motivation, ability, character, achievement, and potential as demonstrated in a
written statement or personal interview.

As stated in your grantmaking procedures, you will select grant recipients on an objective
and nondiscriminatory basis and will not discriminate on the basis of race, gender, sexual
orientation, ethnicity, nationality, or religion. You may, however, take into account the
accomplishments of applicants who have overcome significant obstacles, including
barriers presented by their economic circumstances, physical disabilities, or membership
in a minority group.

To avoid any potential for private benefit to a disqualified person, your grantmaking
procedures provide that disqualified persons (including (i) your past or present directors
or officers; (ii) any family members of such individuals; and (iii) any person who is
considered a “disqualified person” with respect to you within the meaning of Section
4946(a)) are not eligible to receive grant awards from you.

You will generally notify a grant recipient with an award letter indicating the amount of the
grant and the terms and conditions of its use, including any purposes of the grant, which
the recipient will be required to sign and return for purposes of indicating his or her
acceptance of the award. The letter will specify that all amounts must be used: (i) for
tuition at a four-year post-secondary educational institutions that normally maintain a
regular faculty and curriculum; (ii) for fees, books, supplies, and equipment required for
courses at such institutions; or (iii) for other expenses related to matriculation at such
educational institutions, such as housing and other living expenses. The award letter will
describe the reporting requirements and will specify the date by which the recipient must
comply with the reporting requirements.

Within sixty (60) days of the last day of each academic year for which you award a
scholarship or fellowship grant, each scholarship or fellowship grant recipient shall
provide you with a copy of a transcript from the institution at which the recipient is

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enrolled, which shall include all courses taken in that academic year and the grades
received. Each scholarship or fellowship grant recipient must also provide you with a final
report upon completion of their course of study for which the scholarship or fellowship
was awarded.

Your grantmaking procedures provide that all scholarship or fellowship grants awarded
pursuant to Section 4945(g)(1) must be awarded directly to the institution for use
exclusively to pay tuition, fees, books, supplies, equipment, board, and lodging required
to attend the student’s educational program. In this manner, your grantmaking
procedures satisfy the supervision requirements of the regulations with respect to grants
awarded under Section 4945(g)(1).

Your grantmaking procedures provide that you must investigate if any grant recipient fails
to provide the documentation required under applicable procedures within a reasonable
amount of time, and withhold further grant funds until such documentation has been
submitted, consistent with the duty of a private foundation to investigate jeopardized
grants under the Treasury Regulations. You will take reasonable and appropriate steps,
up to and including legal action, to recover improperly expended funds and to ensure that
any funds held by the recipient will be used exclusively for the purposes of the grant
award.

As stated in your grantmaking procedures, you will keep records concerning the conduct
of your individual grantmaking program, which will generally include: all information that
you secure to evaluate grant applicants; the name, address and other contact or
identifying information of each grant recipient; any information you secure to determine
whether a grant applicant is a “disqualified person” with respect to you within the meaning
of Section 4946(a); the amount of grant funds disbursed to each individual grant
recipient; the identified goals and purposes for which each grant is awarded; copies of all
award letters; transcripts and reports provided by grant recipients, as applicable; and any
measures taken to investigate the use of grant funds for improper purposes or to enforce
grant terms.

Description of your request under 4945(g)(3)
You will implement an individual grantmaking program to award grants to qualifying
individuals to achieve a specific objective, produce a report or other similar product, or
improve or enhance a literary, artistic, musical, scientific, teaching, or other similar
capacity, skill, or talent pursuant to Section 4945(g)(3).

Specifically, the purpose of your awards is to support achievement of objectives that are
consistent with those of yours and to support deserving individuals in their efforts to
develop their skills and talents. You may use these types of grants to support changes to
or innovations in individual business practices that further your objectives under Section
170(c)(2)(B), such as seeking to achieve your environmental conservation objectives by
providing financial support or incentives to farmers to enable them to adopt and
implement a more environmentally sustainable approach to their agriculture.

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The pool of grantees eligible for your Section 4945(g)(3) grants consists of U.S. citizens
or legal residents who have demonstrated excellence in their applicable field or exhibit
potential to achieve your specific objective.

Potential grantees of grants to achieve a specific objective or develop a specific skill will
generally be required to submit an application that includes information regarding
financial need; a short biographical statement; a description of the specific objective, skill,
or course of study for which the grant is being sought; and information required for you to
ensure that the potential grantee is not a disqualified person with respect to you within
the meaning of Section 4946(a). You will also, as a general matter, request that grant
applicants submit one or more letters of support and provide references.

You will select all grant recipients in accordance with your grantmaking procedures. As
stated in these procedures, your selection criteria are intended to identify those
individuals who have the greatest need for your assistance, a demonstrated ability to
further your tax-exempt purposes, and/or who show strong potential to succeed. This
selection criteria includes financial need; demonstrated excellence or potential in the
potential field; demonstrated ability to achieve the specific objective or develop a specific
skill in manner that furthers your desired objectives; and an evaluation of the applicant’s
motivation, ability, character, achievement, and potential as demonstrated in a written
statement or personal interview.

As stated in your grantmaking procedures, you will select grant recipients on an objective
and nondiscriminatory basis and will not discriminate on the basis of race, gender, sexual
orientation, ethnicity, nationality, or religion. You may, however, take into account the
accomplishments of applicants who have overcome significant obstacles, including
barriers presented by their economic circumstances, physical disabilities, or membership
in a minority group.

To avoid any potential for private benefit to a disqualified person, your grantmaking
procedures provide that disqualified persons (including (i) your past or present directors
or officers; (ii) any family members of such individuals; and (iii) any person who is
considered a “disqualified person” with respect to you within the meaning of Section
4946(a)) are not eligible to receive grant awards from you.

You will generally notify a grant recipient with an award letter indicating the amount of the
grant and the terms and conditions of its use, including any purposes of the grant, which
the recipient will be required to sign and return for purposes of indicating his or her
acceptance of the award. Each recipient of a grant to achieve a specific objective or
develop a specific skill shall provide you with a report documenting the grantee’s
progress with respect to the grant’s objective and accounting for the use of grant funds
within six (6) months of the first disbursement of grant funds, and every six (6) months
thereafter, including a final report after all grant funds have been used.

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Your grantmaking procedures provide for grants awarded under Section 4945(g)(3) that a
grant recipient must provide a report describing the recipient’s accomplishments toward
the grant purposes and accounting for the use of grant funds within six (6) months of the
initial disbursement, and every six (6) months thereafter, including a final report after all
grant funds have been used.

Your grantmaking procedures provide that you must investigate if any grant recipient fails
to provide the documentation required under applicable procedures within a reasonable
amount of time, and withhold further grant funds until such documentation has been
submitted, consistent with the duty of a private foundation to investigate jeopardized
grants under the Treasury Regulations.

Your grantmaking procedures further provide that if you determine any grants have been
used for improper purposes, you shall take reasonable and appropriate steps, up to and
including legal action, to recover improperly expended funds and to ensure that any funds
held by the recipient will be used exclusively for the purposes of the grant award.

Specifically, you shall not make any further payments to a recipient who has improperly
diverted grant funds until you have received any delinquent transcripts or reports, and
you have received assurances from the recipient that future improper diversions will not
occur. You shall require the recipient to take appropriate precautions to prevent further
diversions. If an individual grant recipient has previously diverted funds and you
determine that the recipient has done so a second time, you shall take all reasonable and
necessary steps to recover the diverted funds and may at your discretion discontinue all
future payments. Alternatively, if the diverted funds are in fact recovered or restored and
you follow the procedures above, you may in your discretion make further payments if
you determine that to do so would further your charitable purposes.

As stated in your grantmaking procedures, you will keep records concerning the conduct
of your individual grantmaking program, which will generally include: all information that
you secure to evaluate grant applicants; the name, address and other contact or
identifying information of each grant recipient; any information you secure to determine
whether a grant applicant is a “disqualified person” with respect to you within the meaning
of Section 4946(a); the amount of grant funds disbursed to each individual grant
recipient; the identified goals and purposes for which each grant is awarded; copies of all
award letters; transcripts and reports provided by grant recipients, as applicable; and any
measures taken to investigate the use of grant funds for improper purposes or to enforce
grant terms.

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.

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 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.

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 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 representatives 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




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