IRS approves a foundation's merit-based scholarship procedures under § 4945(g)(1)

Plain-English summary

A private foundation asked the IRS to approve, in advance, the procedures it will use to
award scholarships. Private foundations normally owe an excise tax on grants to
individuals for study, but Section 4945(g) exempts such grants when the IRS signs off on
the award procedures beforehand and the grants are made objectively and
nondiscriminatorily. This foundation plans to award roughly ten to twelve merit-based
scholarships a year, up to the actual annual tuition, to students facing financial or other
hardship, publicizing the program through social media and free scholarship sites and
choosing winners through an independent three-judge committee. Disqualified persons,
their relatives, and the foundation's own insiders are barred from applying. The IRS
approved the procedures under Section 4945(g)(1), so the grants 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 related expenses under Section 117.

Ruling snapshot

• Question: Do the foundation's scholarship award procedures qualify for advance approval under § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC § 4945(d)(3), (g); §§ 117(a), (b), 170(b)(1)(A)(ii), 170(c)(2)(B)

Full text (IRS public release)

Transcription note: This determination is a scanned document. Per the runbook's OCR
proofreading duty, obvious scanning misreads have been corrected to the letter's
standard wording and its jumbled opening paragraph has been restored to reading order;
genuinely unreadable spots are marked [illegible]; blanks where the IRS redacted
identifying details 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 45201

Date: January 11, 2022

Number: 202214018                     Taxpayer ID number:
Release Date: 4/8/2022

                                      Person to contact:
                                        Name:
                                        ID number:
                                        Telephone:
                                      LEGEND       UIL: 4945.04-04
                                      B = Name

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

Your letter indicates you will operate a scholarship program in which you offer annual scholarships to eligible
individuals to attend a secondary school, college or university as described in IRC Section 170(b)(1)(A)(ii).

The purpose of your program is to provide merit-based scholarships to individuals facing financial or other
hardship. The scholarship is an amount of up to the actual annual tuition per year. You will award approximately
ten to twelve scholarships annually.

You will publicize the scholarship program via social media, including Facebook and LinkedIn, as well as
through free Internet scholarship sites and online media. Applicants must meet the minimum standard for
admission to an educational institution described in IRC Section 170(b)(1)(A)(ii). Applicants must submit an
application form along with copy of official transcript, recommendations, and essays no later than June 15th. The
scholarship recipients will be announced on or before July 15th of each year.

The following individuals are not eligible to apply for the scholarships:

- Disqualified persons
- Relatives of disqualified persons
- Members of the selection committee
- Your officers, directors, and substantial contributors

You will make the selection based on objective nondiscriminatory standards. Objective standards may include the
following:

- Prior academic performance
- Financial need
- Resiliency in overcoming adversity or obstacles
- Personal Interview
- Conclusions drawn from the application and interview as to motivation, character, potential contribution
  to community and commitment to academic study

The scholarship will continue until the student graduates provided that the student meets the following
continuation criteria:

- The student must maintain a 2.5 grade point average on a 4.0 scale,
- The student must maintain continuous full-time enrollment (excluding the summer semester), unless
  prevented from doing so due to catastrophic illness or injury, such illness or injury justification to be
  determined by B, and
- No future payments will be made if the student is expelled from the educational institution that the student
  is attending.

Your selection committee is composed of three judges appointed by your directors and may include your
directors and the founder. The selection committee will independently evaluate the applications and rank all
applicants from highest to lowest. Each judge will send their independent rankings to B, who will combine the
rankings and determine the highest ranked applicant.

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 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 41012-0192
- You can't 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 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.

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, 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

cc: