IRS approves a foundation's scholarship procedures for students at historically black colleges

Plain-English summary

A private foundation asked the IRS to approve, in advance, the way it plans to
award scholarships. Private foundations normally owe an excise tax on grants to
individuals for study, but Section 4945(g)(1) exempts such grants if the IRS
approves the foundation's award procedures ahead of time and the grants are made
objectively and nondiscriminatorily for study at qualifying schools. Here the
foundation will fund scholarships for students who have graduated (or are about to
graduate) from high school and will attend a historically black college or
university (or a related doctoral program), with awards chosen by an independent
selection committee using objective criteria and barring the foundation's insiders
from benefiting. The IRS approved the procedures, so the scholarship payments will
not be taxable expenditures for the foundation, and the awards will be tax-free
scholarships to recipients who use them for qualified tuition and expenses under
Section 117. The approval is conditioned on the foundation keeping records,
monitoring grantees, and running the program as described.

Ruling snapshot

• Question: Do the foundation's scholarship award procedures qualify for
  advance approval under Section 4945(g)(1), so the grants are not taxable
  expenditures?
• Outcome: Approved (scholarship procedures approved)
• Key authorities: IRC §§ 4945(g)(1), 4945(d)(3), 117, 170(b)(1)(A)(ii)

Full text (IRS public release)

Transcription note: This determination is a scanned document (Letter 4792). Per
the runbook's OCR proofreading duty, obvious scanning misreads have been
corrected to the letter's standard wording; genuinely unreadable spots are
marked [illegible]; blanks where the IRS redacted identifying details (the
foundation's field(s) of study, GPA/test-score thresholds, etc.) are left as
gaps. Wording is otherwise reproduced verbatim.

Department of the Treasury
Internal Revenue Service

Tax Exempt and Government Entities
IRS P.O. Box 2508
Cincinnati, OH 4520[illegible]
Date: [illegible]

Taxpayer ID number:
Number: 202210024
Release Date: 3/11/2022

Person to contact:
Name:
ID Number:
Telephone:

LEGEND UIL: 4945.04-04
x dollars = Amount
y dollars = Amount

Dear                    :

You asked for advance approval of your scholarship procedures under Internal Revenue Code (IRC) Section
4945(g)(1). You requested approval of your scholarship program to fund the education of certain qualifying
students.

This approval is required because IRC Section 4945 provides for the imposition of taxes on each taxable
expenditure of a private foundation. IRC Section 4945(d)(3) provides that the term 'taxable expenditure'
includes any amount paid or incurred by a private foundation as a grant to an individual for travel, study, or
similar purposes by the individual unless the grant satisfies the advance approval requirement of IRC Section
4945(g).

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 IRC Section 4945(g)(1). As a result, expenditures you make under these
procedures won't be taxable.

Additionally, 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
IRC Section 117(b)).

Description of your request

You will provide one or more scholarships to young men and women who have graduated from high school and
are enrolled, admitted, or planning to enroll in universities described in IRC Section 170(b)(1)(A)(ii) in the field
of        and/or        . The purpose of the scholarship is to defray the cost of college for the recipients
and to encourage and assist students who have an interest in        and/or        and bring bright

Letter 4792 (Rev. 11-2021)
Catalog Number 58263T

young individuals into the field of        and/or        . Initially, there will be one annual scholarship in
the amount between x dollars and y dollars. The scholarship program will be publicized by providing information
about the program to high school guidance counselors.

You will maintain case histories showing recipients of your scholarships including names, addresses, purposes of
awards and the amount of each grant.

In order to apply, individuals must meet the following requirements:

(i) applicants must already have graduated high school or be senior graduating from high school.

(ii) applicants must be enrolled, admitted, or planning to enroll in an educational institution which is designated
as a historically black college or university, as defined in 20 United States Code ("U.S.C.") 1061 or a post-
graduate program at an educational institution that offers a doctorate in

(iii) applicants must have achieved a grade point average of at least        during their course of study in
high school,

(iv) applicants must have achieved an ACT score of at least        ,

(v) applicants must exhibit high character and integrity, and

(vi) applicants must have declared        or a dual major in
with the intent to pursue a doctorate in        as their major

No scholarship may be awarded to any person who is a "disqualified person" within the meaning of IRC Section
4946(a) or such person's parents, grandparents, great grandparents, spouse, siblings, children, grandchildren, and
great grandchildren, and the spouse of each of the foregoing.

Your board of directors will annually appoint all members of the independent scholarship selection committee.
The scholarship selection committee will be charged with the evaluation of candidates for scholarships. Your
officers, directors, and employees, as well as any "disqualified person" (or relative of such person) within the
meaning of IRC Section 4946(a), may not serve on the selection committee.

The scholarship selection committee will consider the following criteria when making selection:

° first-generation college students

° financial ability of applicants to attend a college or university with the scholarship assistance

* academic performance and standing of the applicants

° performance of each applicant on tests designed to measure ability and aptitude for educational work

* recommendations from instructors and others who have knowledge of the applicants capabilities,
achievements, personal character, and circumstances

° the conclusions from the personal interview on applicant's motivation, character ability, and potential

° additional biographical information regarding an applicant's academic, and other relevant experiences

In order to qualify for renewal of a scholarship, the recipient must:

(i) remain in good standing at the historically black college or university as defined in 20 U.S.C. 1061 or a post-
graduate program at an educational institution that offers a doctorate in

(ii) have made tangible progress towards completing the requirements to obtain a degree in pre-medical

or similar major in preparation for post-graduate studies in        , and

(iii) have a grade point average of at least 3.7 with respect to the previous academic period at recipient's
undergraduate institution or with respect to the previous academic period at the recipient's postgraduate
institution

Scholarship grants will be paid directly to the recipient's educational institution. You will make arrangements to
receive a report at least once a year of the recipients courses taken and grades received during the scholarship is

Letter 4792 (Rev. 11-2021)
Catalog Number 58263T

outstanding and to receive a final report from the educational institution upon the completion of the recipients
course of study. You may also request the educational institution to use the scholarship money only to defray the
recipient's expenses for certain "qualified expenses" (such as tuition, enrollment fees, and course-related
expenses, such as fees, books, supplies, and equipment required of all students enrolled at the educational
institution). If a recipient of a scholarship withdraws from an educational institution during an academic term,
you will attempt to have the institution return any unused funds. Recipients who transfer from one educational
institution to another with funds remaining must notify you and the financial aid office and any unused portion of
the funds should be refunded.

You represent that you will complete the following:

* Arrange to receive and review grantee reports annually and upon completion of the purpose for which the
grant was awarded,

° Investigate diversion of funds from their intended purposes,

° Take all reasonable and appropriate steps to recover the diverted funds and ensure other grant funds held by
a grantee are used for their intended purposes, and

* 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 diversion from occurring.

You also represent that you will:

* Maintain all records relating to individual grants including information obtained to evaluate grantees.

* Identify whether a grantee is a disqualified person,

° Establish the amount and purpose of each grant, and

* Establish that you undertook the supervision and investigation of grants described above.

Basis for our determination

IRC Section 4945 imposes excise taxes on the taxable expenditures of private foundations. 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 the following requirements of IRC 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 IRC Section 117(a).

* The grant is to be used for study at an educational organization described in IRC 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 IRS at:

Internal Revenue Service
Exempt Organizations Determinations
TE/GE Stop 31A Team 105
P.O. Box 12192
Covington, KY 41012-3192

* You can't award grants to your creators, officers, directors, trustees, foundation managers, or

Letter 4792 (Rev. 11-2021)
Catalog Number 58263T

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 IRC 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'll make this determination letter available for public inspection after deleting personally identifiable
information, as required by IRC Section 6110. We've enclosed Letter 437, Notice of Intention to Disclose -
Rulings, and a copy of the letter that shows our proposed deletions.

° If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us.

° If you agree with our deletions, you don't need to take any further action.

Please keep a copy of this letter in your records.

If you have questions, you can contact the person shown at the top of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Letter 437

Letter 4792 (Rev. 11-2021)
Catalog Number 58263T