IRS approves a multistate essay scholarship program

Plain-English summary

A private foundation proposed nonrenewable scholarships for graduating high school seniors in four states who planned to attend accredited four-year colleges or universities. Home-schooled applicants could qualify by documenting high school equivalency and college eligibility. Applicants would submit essays explaining how their education would help their communities, and an outside organization and volunteer judges would screen and score the submissions before the trustee selected some winners. Employees and insiders of a related organization, their families, and household members were ineligible. The foundation also committed to monitoring awards, addressing diverted funds, and maintaining detailed records. The IRS approved the procedures as objective and nondiscriminatory under IRC § 4945(g)(1).

Ruling snapshot

• Question: Do the foundation's multistate essay scholarship procedures satisfy the advance-approval requirements?
• Outcome: Approved
• Key authorities: IRC §§ 117(a)-(b), 170(b)(1)(A)(ii), 170(c)(2)(B), and 4945(g)(1)

Full text (IRS public release)

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

Employer Identification Number:

Date: October 6, 2020
Contact person - ID number:

Number: 202053018 Contact telephone number:
Release Date: 12/31/2020

LEGEND UIL: 4945.04-04
B= Name

C= State

D= State

F= State

G= State

H= Organization
J= Organization
K= Number

L= Number

M= Number

N= Number

P= Number

x dollars= Amount
y 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 provided in Code Section 117(b)).

Letter 4792 (10-2012)
Catalog Number 58263T

2

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

You are dedicated to cultivating prosperity for local communities and helping change the
lives of young people in the communities you serve.

The purpose of B is to encourage young people living in the states of C, D, F, and G
to pursue their education by assisting them financially in their endeavor. To publicize B,
you will send out announcements to media news outlets. To assist, administer, and
supervise B, you will partner with H.

To be eligible for B, applicants must be legal United States residents and:

• Reside within the states of C, D, F, and G;
• Be high school graduating seniors from public, private, parochial and charter
schools who plan to attend a four-year accredited college or university.

Home-schooled students are also eligible. However, they must provide documentation of
high school equivalency and college eligibility as an incoming freshman.

To apply for B, eligible applicants must electronically submit an application available on
line along with a composed essay. The essay must explain how their college education
will help them cultivate prosperity in their neighborhood/community.

H will conduct an initial screening of all submissions based on the criteria you provide
and then evaluate the essays on content, style, grammar, and spelling. H will then
forward the final K top submissions to a judging committee consisting of individuals from
J who are selected by their managers and agree to volunteer as a judge. The judging
committee will evaluate and grade/score the essays. Once they grade/score the essays,
they are placed in order of scores. The Trustee is given the top M essays to then select
the top N winners based on the essay’s content. These recipients will receive x dollars.
There will be P remaining winners who will be selected strictly on their essay scores.
These recipients will receive y dollars.

Scholarship awards will be paid to winners. Scholarship awards cannot be deferred and
are not renewable. You will have a formal ceremony to present the awards and
subsequently, you will send out photos to student's local papers and other media outlets.

Employees, officers and directors of J, its subsidiaries, affiliates, affiliates, distributors,
advertising and promotion agencies and their family members (defined as spouses,
children, parents, siblings and in-laws) and those living in their households are not
eligible for B. This exclusion also applies to anyone who may become an employee of J
after submitting their application.

You represent 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,

Letter 4792 (10-2012)
Catalog Number 58263T

3

(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 a
grantee are used for their intended purposes, and (4) 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: (1) maintain all records relating to individual grants including
information obtained to evaluate grantees, (2) identify whether a grantee is a disqualified
person, (3) establish the amount and purposes of each grant, and (4) establish that you
undertook the supervision and investigation of 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).

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.

Letter 4792 (10-2012)
Catalog Number 58263T

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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.

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