IRS approves a foundation's need-based scholarship procedures for students at Christian grade and high schools

Plain-English summary

A private foundation asked the IRS to approve, in advance, how it will award need-based scholarships to children attending private Christian grade schools and high schools. Without advance approval, a private foundation's grants to individuals for study can trigger an excise tax under IRC § 4945. Eligibility turns on household income limits, and awards (up to a set maximum per student) are chosen on financial need, academic performance, test scores, recommendations, and activities, with checks mailed directly to the school. 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 need-based 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 Date: 4/20/2022
Internal Revenue Service
Tax Exempt and Government Entities
P.O. Box 2508
Cincinnati, OH 45201

Taxpayer ID number:
Number: 202228022 Person to contact:
Release Date: 7/15/2022

LEGEND UIL: 4945.04-04
B = Number
x dollars = Amount
y dollars = Amount
z 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 will operate a needs-based scholarship program for children in Christian grade schools and high schools. You anticipate awarding in the range of B scholarships per year, with a maximum award of x dollars per student.

You will publicize the availability of scholarships via local news, on your website, and with local Christian schools. Initial eligibility is based on household income less than y dollars per year, z dollars for families with or more children, and the student attends (or will attend) a private Christian school.

The Board of Directors will serve as the selection committee. Relatives of the selection committee, or of your officers, directors, or substantial contributors are not eligible for scholarship awards.

Selection of grant recipients will be based on financial need; prior academic performance and achievement; performance on tests designed to measure ability and aptitude for higher education (such as the ACT and SAT); recommendations from instructors, athletic directors, or other individuals unrelated to the applicant; and involvement in community activities, artistic activities, work experience, athletics, and other extra-curricular activities.

Scholarship checks will be made payable in one or two payment(s) per school year and mailed directly to the school. The award will be applied to the student's fall and/or spring semester tuition, fees, and books. You will require recipients to provide grade transcripts following each semester, quarter, or term to verify each recipient is still in good standing with the school and satisfies the ongoing eligibility requirements. Recipients will qualify for renewal of a grant if they are attending classes, in good standing with the school, and maintain at least a 2.0 GPA. Schools are required to return any unused funds.

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

• 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

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