IRS grants advance approval under section 4945(g) of a private foundation's scholarship procedures for a sponsor-based program awarding scholarships to members' children and grandchildren

Plain-English summary

A private foundation asked the IRS for advance approval of the procedures it will use to award scholarships. Private foundations need this approval so their grants to individuals are not treated as "taxable expenditures" under section 4945. The program (called A) awards one scholarship from each participating sponsor location to graduating high school seniors who are children or grandchildren of, or member-level customers of, a sponsor, and who reside in a defined area. Each sponsor location's advisory board appoints a selection committee (a local farmer, a professional or businessperson, and a school official) that picks recipients on objective criteria such as academic progress, leadership, citizenship, and financial need. The scholarship is a fixed amount paid directly to the recipient's college or university for tuition, books, and supplies. The IRS approved the procedures: they meet section 4945(g)(1), so the foundation's grant expenditures will not be taxable, and the awards are scholarships that are tax-free to recipients under section 117(b) when used for qualified tuition and related expenses.

Ruling snapshot

• Question: Do the foundation's scholarship-award procedures qualify for advance approval under section 4945(g)(1) so that the grants are not taxable expenditures?
• Outcome: Approved
• Key authorities: IRC § 4945(g)(1); IRC § 117(a), (b); IRC § 170(b)(1)(A)(ii); IRC § 170(c)(2)(B)

Full text (IRS public release)

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

Number: 202142015
Release Date: 10/22/2021

Employer Identification Number:

Date: July 27, 2021

Contact person - ID number:

Contact telephone number:

LEGEND
UIL: 4945.04-04
A = General Scholarship Program
B = Scholarship Sponsor
C = Company 1
D = Company 2
E = Company 3
F = Local Affiliates
G = Area of the United States

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)).

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

Your purpose is to offer scholarship annually to graduating high school seniors.

The purpose of A is to award scholarships to graduating high school seniors to attend an
accredited college or university to help them pursue studies and develop careers that [illegible]

The scholarship grants amount has been fixed to $ , this amount will remain at this
level until total foundation distributions fall below the % minimum distribution
requirement prescribed by the Internal Revenue Service. The scholarship grant is to
assist with the cost of tuition, books and supplies required to attend the accredited
college or university for a full-time student. A does not offer a renewal.

Scholarship funds are distributed directly to the college or university that the recipient will
be attending. Scholarship funds are not distributed directly to the recipients. The Director
of Financial Aid at each school is instructed to make the funds available to be applied
towards tuition, books, supplies and equipment required for courses. One half of the
scholarship amount ($ ) is available for the first semester and the other half ($ )
is available for the second semester.

The college or university is instructed with the following guidelines:

1. If the student does not attend classes at the beginning of the semester, the
   scholarship amount will be refunded to the Foundation.
2. If the student drops out of school after the date, the college will follow their
   standard refund policy.
3. If the student transfers to a different college or university, any unused funds will
   be returned to the foundation.

The criteria for eligibility to apply for the A scholarship program are:
a. The applicant must be a graduating high school senior that will be attending an
accredited college or university as a full-time student.
b. The applicant must be a child or grandchild or a member level customer at a B
and their corresponding member level requirements are:

1. C & D - $ in annual business
2. C & E - $ in annual business
   c. The applicant must be a resident of G.
   d. There must be a B location within a _-mile radius of the applicant's primary
   residence.
   e. Employees of the B are not eligible for this scholarship.

The number of annual grants is determined by the number of B that are participating in
any given year. One scholarship is awarded from each physical location of participating
sponsors. A do not require recipients to perform services after receiving the awards.

Each B store location has an advisory board that appoints a selection committee each
year consisting of at least three, but no more than five persons that include:

a. A leading farmer in the community

b. A prominent professional or businessperson in the community

c. A high school Superintendent, Principal or Counselor in the community

The store location's Manager will serve as the Secretary of the Committee but does not
have voting rights. Each selection committee reviews the scholarship applications for
their location and selects the scholarship recipients based on the following criteria:

a. Interest in furthering his/her education in fields that benefit rural life

b. Participation and leadership in school, church and community activities

c. Reputation for good citizenship and moral character

d. Financial need, income and willingness to work

e. Satisfactory academic progress

There is no term limit requirement for members of the selection committee, they can
serve for many years if willing. However, the advisory board has the ability to replace
members of the selection committee on an annual basis. Each scholarship sponsor
location has an annual meeting where location members will vote to appoint advisory
board members. Only members of each scholarship sponsor are eligible to serve on the
advisory boards.

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.

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

[Transcriber's note: The remaining pages of this PDF (an employer-related Letter 4792
scholarship approval that bears no determination number of its own) are a separate
determination and, under the one-number-one-letter convention, are not reproduced here.]