IRS approves scholarship procedures funding low-income students at high-graduation-rate colleges

Plain-English summary

A private foundation asked the IRS to approve, in advance, how it will award
college scholarships. Without advance approval, a private foundation's grants to
individuals for study can trigger an excise tax under IRC § 4945. This program
funds students from low-income households in a particular county to attend
specified in-state colleges and universities that have high graduation rates.
Eligibility turns on residency, recent high school graduation in the county,
acceptance at an eligible institution, and earning designated scholarships or
qualifying for a Pell Grant; grants are paid directly to the school and are
renewable. The IRS found the selection process objective and nondiscriminatory,
with adequate recordkeeping and oversight, so the procedures meet
IRC § 4945(g)(1). Grants made under these procedures will not be taxable
expenditures, and the awards are tax-free to recipients used for qualified
tuition and related expenses under IRC § 117. The approval covers only this
program as described.

Ruling snapshot

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

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
P.O. Box 2508
Cincinnati, OH 45201
Date: April 18, 2022

Number: 202228017 Taxpayer ID number:
Release Date: 7/15/2022
Person to contact:

LEGEND: UIL: 4945.04-04
U = Program 1
V = Program 2
W = County
X = Scholarship
y dollars = amount
Z = State

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.

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 operate a program (X) to make educational grants enabling students from low-income households to
attend a college or university. You will award grants to eligible students (each a "Grant Recipient") for study at
certain specified Z colleges and universities, each of which is an "educational organization" as described in
Section 170(b)(1)(A)(ii) of the Code and has a -year graduation success rate of more than % (based on
National Center for Education statistics) (each an "Eligible Institution", and collectively, the "Eligible
Institutions"). The proceeds of each grant will be paid directly to an Eligible Institution, to be applied to the
costs of the Grant Recipient's attendance at such Eligible Institution.

Individual applicants must reside in W, have graduated in 2021 or later from high school in W, be accepted at
an Eligible Institution, earn a U or V Scholarship, or qualify for a Pell Grant. You anticipate grants awarded
will be y dollars annually to cover tuition, fees, room, board, etc. Grants will be renewable for up to years.
You currently have no limitation on the number of awards you will make annually. X will be publicized
through your website.

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 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

• 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 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

Letter 4792 (Rev. 4-2021)
Catalog Number 58263T