IRS approves a company-linked foundation's scholarships for students entering the skilled trades

Plain-English summary

A private foundation funded by a company (the company's owners serve as the foundation's officers) asked the IRS to approve its scholarship procedures under IRC § 4945(g)(1). The program awards scholarships to local high school students pursuing carpentry, plumbing, electrical, or HVAC training. Dependents of current or former company employees may apply. An independent selection committee (a local investment advisor, high school guidance counselors, and local business owners) picks winners on grades, essays, and teacher recommendations, and committee members' relatives are barred. Because private foundations owe an excise tax on grants to individuals for study unless the IRS pre-approves the procedures, this letter clears the program: the scholarships are not taxable expenditures, and they are tax-free to students used for qualified tuition under § 117. Scholarships are paid directly to the schools and can renew if the student keeps a C average.

Ruling snapshot

• Question: Do the foundation's trade-scholarship procedures qualify for advance approval under IRC § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 4945(g)(1), 4945(d)(3), 117; Treas. Reg. under § 4945

Full text (IRS public release)

Department of the Treasury                          Date: 04/11/2022
Internal Revenue Service
Tax Exempt and Government Entities

P.O. Box 2508
Cincinnati, OH 45201

                                                    Taxpayer ID number:

                                                    Person to contact:
                                                    Name:
                                                    ID number:
                                                    Telephone:

Release Number: 202227013
Release Date: 7/8/2022

LEGEND                                              UIL: 4945.04-04

X = Organization
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

Your letter indicates you operate a grant program to award scholarships to high school students pursuing a
higher education in the trade of carpentry, plumbing, electrical, or HVAC. Annually, you award to
scholarships to local high school students. The awards are in the range of y dollars. You are funded from X and
the owners of X serve as your officers.

You publicize the scholarship program at local high schools and vocational schools with their guidance
departments. Dependents of former or current employees of X are eligible to apply for scholarships. Each
applicant must submit a completed application by the due date to the high school guidance department. The
application must be accompanied by proof of high school graduation and verification of enrollment in a college
or technical school.

Your officers identify individuals to serve on the independent scholarship selection committee. The independent
selection committee consists of a local investment advisor, guidance counselors from local high schools, and
local business owners. The selection committee members or their relatives are not eligible to apply for
scholarships.

The selection committee selects the most qualified students based on their grades, essays, and teacher
recommendations. The selection committee determines the amount of each scholarship.

You retain the college or technical school enrollment verification information along with each student's
career path. Case histories include recipient names, addresses, purpose of the awards, and any relationship
to X's current or former employees are maintained.

The scholarships are paid directly to the recipients' colleges or technical schools and transcripts are required for
each student. Scholarship recipients can re-apply for the scholarships if their transcripts demonstrate a C average
or better. If a recipient decides to change the career path, the grant will not be renewed. The selection committee
reviews reports received from recipients and their institutions prior to issuing any additional funds.

If there is any indication that funds were misused, the grant will be terminated immediately and the selection
committee will pursue collection of any misused funds. The committee will also send a letter to the recipient
demanding a return of the funds. You will refer the matter to a collection attorney if necessary.

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.
* The effective date of our approval is March 23, 2021, which is the date your request was submitted.
* 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:

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T