IRS grants advance approval of a private foundation's scholarship procedures under section 4945(g) for a program tracking disadvantaged students from elementary school through college

Plain-English summary

A private foundation asked the IRS for advance approval of the procedures it will use to award scholarships. Private foundations must get this approval so their grants to individuals are not treated as "taxable expenditures" under section 4945. The foundation runs a program that partners with public schools to identify a school and grade in an underprivileged neighborhood (based on the share of students on free and reduced lunch), then follows that class from elementary school through high school and offers college scholarships to those who stay eligible. Scholarships cover tuition, room, and board at in-state universities, require a minimum grade point average and course load, and are paid directly to the schools. The IRS approved the procedures. It found 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: 202142016
Release Date: 10/22/2021

Employer Identification Number:

Date: July 27, 2021

Contact person - ID number:

Contact telephone number:

LEGEND
UIL: 4945.04-04
Q = Specific
U = County and associated school districts
W = Individuals
X = State
Y = Scholarship Program
Z = City (Metropolitan Area)

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 that you will operate a grant-making program called Y.

The goal of Y is to identify students who would need scholarship funds to attend college
and to encourage academic performance; in order to pursue this goal, you will identify
students who are attending elementary school and follow them through high school. The
objectives of Y will be achieved by forming a unique public/private partnership with public
schools. Through this partnership, Y will help the public schools improve the educational
outcomes for their students and increase the college participation of children from
disadvantaged neighborhoods in the Z.

Specifically, you will work with the local Z public schools' administrators to identify
schools in the underprivileged neighborhoods with high (exceeding % enrollment)
student population on federal free and reduced lunch programs. From this selection you
will meet with administrators to identify a particular school and class that would support Y
and to carry out its purpose. In addition, you will consider a class that is old enough to
appreciate Y and young enough to benefit from the academic encouragement that Y will
offer.

Once a school and grade level has been identified, Y will be made available to all
students at that school and in that grade, who participate in the free and reduced lunch
program. These individuals will be defined as eligible "Scholarship Students." Eligibility
will be re-evaluated in the chosen class after their senior year of high school. In order to
remain eligible, the Scholarship Student must:

a. Graduate from the public elementary school chosen as well as from the local
public high school.

b. Demonstrate financial need. Such need shall be determined based on the
eligibility of a Scholarship Student to qualify for aid under the Q program.

You have identified the first group of eligible students by using the methodology as stated
above. You worked with public schools and identified numerous public schools in the U
that have more than % of their enrolled students participating in the federal free and
reduced lunch program. From this group of schools, you met with administrators to
identify a particular school and class that would support Y. A third-grade class was
determined to be the most appropriate. You explained that you have an initial list of
students and a list of transfer students. The transfer students would only be eligible for
scholarships if the test results on the eighth-grade national standardized test have met
the performance standards. This information will be available from the school after the
eighth-grade graduation. The two groups are defined below:

a. The initial group will be students who are enrolled in the grade level and school
originally selected. If the student leaves the particular school selected prior to
eighth-grade graduation or the student does not graduate from the corresponding
high school, then the student will no longer be eligible for Y. Any student in the
selected class who is not promoted with the class in each year through high school
will also no longer be eligible.

b. A transfer student who joins the class at the same elementary school and qualifies
for the free or reduced lunch program will also be included as an eligible student
provided that the group of Scholarship Students when they reach eighth grade
meets certain performance standards. Those standards will be based on
performance on a national standardized test being used at the school. The group
of Scholarship Students will either need to beat the national average on such test
or show significant improvement over their scores in prior years.

A transfer student is anyone assigned to the selected class after the initial date who is a
new enrollee in the school. It will not include a person who is previously enrolled at the
school in a different class who leaves the school and then returns and is now assigned to
the selected class. It will also not include anyone who becomes assigned to the class
who becomes a member because they either were not promoted or because they were
otherwise held back for any reason.

You will receive the information from the grade school after eighth-grade graduation so
that you can determine the final list of eligible students. No names will be added to the
list after eighth-grade graduation. In the senior year of high school all students who were
on the list who are still enrolled in the district high school and are eligible for Q aid will be
sent a letter in September informing them to notify you when they are accepted to
college. There will also be follow-up letters in January and April to those who have not
responded to the earlier letters.

The conditions of the scholarship are:

a. Students must use other scholarship funds available to them before being eligible
for funds under Y. Students must work with the committee identified below to
identify and apply for other scholarships for which the student may be qualified.

b. Scholarships will cover cost of tuition, room and board at any X state university.

c. Scholarships will cover tuition and books for any X community college.

d. Upon prior approval, scholarships can be used outside the state of X in dollar
amounts not to exceed the cost of an equivalent education in X.

e. Student must maintain a 2.0 grade point average (GPA) in college. If the student's
GPA falls below 2.0, the student may be reinstated if he/she brings the GPA back
up to 2.0 or higher.

f. Student must complete a minimum of 12 credit hours per term and make regular
progress towards a degree.

g. Scholarships are good for a maximum of 4 years.

h. Students who graduate from college in less than 4 years can use the scholarship
toward graduate school fees and costs.

Y will be introduced to the chosen grades and schools through public meetings. It is
anticipated that you will provide a commitment letter for each student who qualifies as a
Scholarship Student. This letter will explain the commitment being made by all parties.

Your administrative trustees have selected W as the initial members of the committee to
select grades and schools where Y will be implemented. If Y grows to a point where
additional committee members are necessary, the administrative trustees intend to
designate selection of such additional committee members to W. However, upon the
designation of any additional committee members, the names of such members will be
submitted to the administrative trustees. Your administrative trustees will maintain
oversight responsibility for the selection of qualified committee members. No relatives of
members of the selection committee, or relatives of officers, directors or substantial
contributors will be eligible for awards under Y.

You anticipate that all funds will be paid directly to accredited educational institutions,
which must agree to use the scholarship funds to cover the recipients authorized
expenses at the institution. If a recipient wishes to attend an educational institution that is
not willing to comply, the recipient will be required at the end of the academic year to
send you a report of courses taken, and grades received. This report must be verified by
the educational institution. If the report is not submitted on a timely basis you will take all
appropriate steps to recover funds given to such recipient. Such action may include legal
action against the recipient if deemed appropriate. No additional funds will be given to
any recipient if such recipient fails to submit the required report. At the time that a
recipient is notified of the awarding of a scholarship, the recipient will be required to
agree to return all grant money if such report is not submitted on a timely basis. In
addition, you will investigate any possible misuse of funds by the recipient, withhold
further funds during investigation if a misuse of funds is discovered, and seek recovery of
any misused funds.

You will maintain the following records:

• Information used to evaluate the qualifications of potential grantees. This would
  include not only your information on the individual students, but the information
  obtained to evaluate all potential grantees within your search process from the
  selecting area, school and grade;

• Identification of the grantees (including any relationship of any grantee to the
  private foundation), the amount and purpose of each grant; and

• All grantee reports and other follow-up data obtained in administering Y.

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