IRS approves scholarship and individual educational grant procedures

Plain-English summary

A private foundation proposed scholarships under IRC § 4945(g)(1) and educational or talent-development grants under § 4945(g)(3). Its program would support higher education, youth, stronger communities, environmental conservation, and individual skills, with eligibility limited to U.S. citizens or legal residents. A selection committee would use financial need, achievement, recommendations, potential, and other nondiscriminatory criteria while excluding directors, officers, their families, and other disqualified persons. The foundation would use award agreements, direct institutional payments for scholarships, periodic recipient reports, investigations of misuse, and detailed records. The IRS approved both sets of procedures, so grants made consistently with them would not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation's scholarship and other individual educational grant procedures meet §§ 4945(g)(1) and 4945(g)(3)?
• Outcome: Approved
• Key authorities: IRC §§ 74, 117, 170, 4945, and 4946; Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

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

Date: November 24, 2020

Employer Identification Number:

Contact person - ID number:

Number: 202107013
Release Date: 2/19/2021

Contact telephone number:

LEGEND
X = Names
w dollars = Amount
y dollars = Amount
z dollars = Amount

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, Section 4945(g)(1) 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 grantmaking program. Under your program you
will award grants under both IRC Sections 4945(g)(1) and 4945(g)(3).

Your purpose is to build stronger communities, support youth, and advance
environmental conservation and climate change mitigation strategies with a particular
focus on the States of X.

The purposes of your grant program will be to:

• Improve access to tertiary education for deserving students lacking the financial
resources to cover tuition and other educational expenses;

• Support achievement of objectives that are consistent with your beforementioned
purposes; and

• Support deserving individuals in their efforts to develop their skills and talents.

Eligible Section 4945(g)(1) grantees include any U.S. citizen or legal resident who is
enrolled, or intends to enroll, in an institution of higher education described in Section
170(b)(1)(A)(ii). Similarly, the pool of grantees eligible for Section 4945(g)(3) grants
consists of U.S. citizens or legal residents who have demonstrated excellence in their
applicable field.

The number and amount of individual grants, you award each year will be determined by
balancing the amount of your funds available for disbursement and the relative needs of
your grantmaking program. In the near term, you anticipate making two four-year
scholarship grants per year in the amount of w dollars resulting in an annual outlay of y
dollars for the first year. Four years into the program, when there are eight scholarship
recipients, the annual outlay will be z dollars.

You will publicize your grantmaking program through your typical communication
channels, including website and targeted communications to interested stakeholders and

potential applicants.

Potential grantees 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; and, for scholarship or fellowship grants, proof of enrollment or admission.
You will also, as a general matter, request that grant applicants submit one or more
letters of support and provide references.

Your selection committee for all grants is comprised of your staff and others in leadership
positions, including members of your Board of Directors. Criteria for membership on the
selection committee includes a demonstrated commitment to your mission and the
program’s aim of providing financial assistance to under-resourced students. Selection
committee members will be replaced in the normal course as there is turnover in your
staff and Board members in accordance with your hiring and Board recruitment
procedures.

Your selection committee will use selection criteria that will 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.

Specifically, the selection committee will select individual grant recipients on the basis of
financial need, prior academic performance, recommendations from instructors and/or
college access programs, demonstrated excellence in their applicable field, and a written
statement and/or personal interview which provides you with relevant information as to
the applicant’s motivation, character, ability, achievement, potential, and plans for the
future.

Further, in selecting individual grant recipients, the selection committee will not
discriminate on the basis of race, gender, sexual orientation, ethnicity, nationality, or
religion but may take into account the accomplishments of those applicants who have
overcome significant obstacles, including barriers presented by their economic
circumstances, physical disabilities, or membership in a minority group.

In addition, to avoid any potential for private benefit to a disqualified person, the following
persons are not eligible to receive grants:

• Your past or present directors or officers;

• Any family members of past or present directors or officers; and

• any person considered a disqualified person with respect to you within the
meaning of Section 4946(a).

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 their acceptance
of the award.

In the case of scholarship or fellowship grants under Section 4945(g)(1), the letter will
specify that all amounts must be used: (i) for tuition at a four-year post-secondary
educational institution that normally maintains a regular facility 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.

Moreover, you anticipate making both one-time and renewable grants, such as
scholarships for consecutive years of schooling. For either type of individual grant, you
will require the individual grant recipient to utilize the granted funds for the charitable and
educational purposes for which you granted them. You will require periodic reporting by
grantees on their use of funds, which will be no less than annual.

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.

For a scholarship or fellowship grant, you will require a recipient to provide a copy of their
transcript showing all courses taken in that academic year and the grades received. Each

scholarship or fellowship grant recipient will also be required to provide a final report
upon completion of their course of study for which the scholarship was awarded.

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

You will investigate if any grant recipient fails to provide the documentation required
under within a reasonable amount of time and withhold further grant funds until such
documentation has been submitted.

If you determine that any grants have been used for improper purposes, 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.

You will keep records concerning your individual grantmaking program, which will
generally include:

• All information you secure to evaluate grant applicants:

• The name, address and other contact or identifying information of each grant
recipient;

• An 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 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.

• 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.

Under 4945(g)(3), 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.

• 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