IRS approves scholarship procedures for underrepresented, first-generation undergraduates

Plain-English summary

A private foundation asked the IRS to approve, in advance, how it will award
scholarships aimed at underrepresented students. Without advance approval, a
private foundation's grants to individuals for study can trigger an excise tax
under IRC § 4945. The program funds undergraduate study for members of an
underrepresented ethnic group from three states, focusing on students with
financial need who would be first-generation college students, selected through
applications, interviews, recommendations, and a review panel that screens out
disqualified persons and conflicts of interest. 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: 202228021 Taxpayer ID number:
Release Date: 7/15/2022
Person to contact:

LEGEND: UIL: 4945.04-04
W = state 1
X = state 2
Y = state 3
Z = ethnicity

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 to promote the education of underrepresented individuals. Specifically, you will
provide scholarships to underrepresented Z individuals from W, X and Y to study at educational organizations
and earn an undergraduate degree. These underrepresented individuals are those who do not have the financial
means to study at an educational organization and/or would be first-generation college students. Your program
will be publicized at local places of worship, in local publications, and at local high schools and community
events.

The number and amount of grants will vary year-to-year and be determined by the number of applications you
receive and your available resources. Amounts are to be commensurate with the needs of the grantee to
supplement and offset the costs of tuition, books, and supplies for any part of one academic year at the
educational institution where the student is enrolled. Grants may be renewed each year based upon the
student's academic standing.

Each applicant will undergo a personal interview and is required to submit the following:

• Statements describing their academic performance/background and history of immediate family members
  earning undergraduate degrees (if first-generation college student)

• Statements detailing their desired program(s) of study, the relevant educational institution, and a breakdown
  of the underlying costs of tuition, books, and supplies

• Statement/documents supporting financial need

• Letter of recommendation from an instructor at their high school

Your Selection Panel will be composed of a group, with at least one individual selected by you, that are not
disqualified persons under IRC Section 4946 and not related nor a subordinate to any of your board of trustees,
members, officers, or employees as described in IRC Section 672(c). None of the Selection Panel, Board of
Trustees and members/officers/employees will be in a position to derive private benefit, directly or indirectly, if
certain potential scholarship recipients are selected over others. Individuals related to such individuals are not
eligible to apply.

Selections will be made by the Selection Panel's majority consent and proposed to your Board of
Trustees/Directors. Your Board will review and make the final determinations on grant recipients. They may
accept any, all or none of the proposed grantees and will determine the amounts to be awarded to each grantee.
The selection of individual grantees will be made based on criteria reasonably related to the grant, including but
not limited to the following: prior academic performance, recommendations from high school instructors,
financial need, the personal interview, and whether the applicant would be a first-generation college student.
Each selected recipient will be required to agree in writing to use the grant funds for the stated purpose of the
grant and submit a report to you annually describing their accomplishments and how the funds were used.

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

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

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