IRS pre-approves a foundation's scholarship and issue-analysis grant programs

Plain-English summary

A private foundation asked the IRS to approve, in advance, two sets of procedures: one for awarding scholarships under section 4945(g)(1) and one for awarding educational grants to individuals under section 4945(g)(3). Advance approval matters because a private foundation's grants to individuals for study are normally "taxable expenditures" hit with an excise tax under section 4945, unless the IRS signs off on the procedures ahead of time. The scholarship program pays tuition, fees, and related expenses for students enrolled at educational organizations, with recipients chosen on objective criteria such as grades, test scores, recommendations, financial need, and a personal interview. The individual grant program funds people who already have expertise to do critical analysis, or to further develop their knowledge, on issues within the foundation's mission (for example, criminal justice and education), selected by the board or a screened selection committee. The foundation committed to the usual reporting, oversight, fund-recovery, and record-keeping steps, and barred grants to insiders or their relatives. The IRS approved both programs, so grants made under either will not be taxable expenditures; scholarships that recipients use for qualified tuition and related expenses are also tax-free to them under section 117.

Ruling snapshot

• Question: Do the foundation's scholarship procedures (§ 4945(g)(1)) and its individual educational-grant procedures (§ 4945(g)(3)) qualify for advance approval, so the grants are not taxable expenditures?
• Outcome: approved (both programs)
• Key authorities: IRC § 4945(d)(3), (g)(1), (g)(3); IRC §§ 74(b), 117(a), (b), 170(b)(1)(A)(ii); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

Department of the Treasury Date:05/02/2022
Internal Revenue Service

Tax Exempt and Government Entities

IRS P.O. Box 2508

Taxpayer ID number:

Cincinnati, OH 45201 Person to contact:
Name:
ID number:
Telephone:
Number: 202230017
Release Date: 7/29/2022
LEGEND UIL: 4945.04-04

X = City, State
y dollars = amount

Dear

You asked for advance approval of your scholarship procedures under Internal Revenue Code (IRC) Section
4945(g)(1) and advance approval of your educational grant procedures under IRC Section 4945(g)(3).

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)).

We also approved your procedures for awarding educational grants. Based on the information you submitted,
and assuming you will conduct your program as proposed, we determined that your procedures for awarding
educational grants meet the requirements of IRC Section 4945(g)(3). As a result, expenditures you make
under these procedures won't be taxable.

Description of your request
Your letter indicates you will operate a scholarship grant program and an individual grant program.

Scholarship Program:

You are currently developing this program which will further your charitable mission by providing education
assistance to deserving individuals in X and around the world. Scholarship amounts will be y dollars. Funds will
be used for tuition, fees, and related expenses (books, supplies, equipment for courses, and living expenses).
You will disseminate information about this program to students and prospective students using solicitations

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

and announcements. Eligibility will be limited to those enrolled in a course of study at an educational
organization described in IRC Section 170(b)(1)(A)(ii). Applicants must complete a formal, written application
which will include information such as a narrative of interest, academic transcripts, scores from tests that
measure ability and aptitude for college and graduate work, and recommendations from instructors.
Scholarships will be awarded on an objective and nondiscriminatory basis. Criteria used for selection include
but are not limited to prior academic performance, performance on tests designed to measure ability and
aptitude for college work, recommendations from instructors, financial need, and the conclusions drawn from a
personal interview (academic interest, motivation, character, ability, and potential).

Scholarship funds will ordinarily be paid directly to the educational organization and you will annually request
proof of enrollment and attendance. Students receiving any funds directly will have to provide an annual,
periodic report on the use and progress made. These reports will include an account of courses taken during the
grant period and grades received. In the case of individuals whose study at an educational institution does not
involve the taking of courses but only the preparation of research, papers, or projects, you will require a report
on the progress at least once a year. These reports will be verified by the educational institution attended by the
student. Upon completion of the student's education at the educational institution, a formal report describing the
student's accomplishments and accounting for all funds received with respect to the grant will be required.

Individual Grant Program:
You will provide grants to individuals to achieve a specific objective. Each award will have one of two
purposes:

* To allow a person with existing skills and knowledge to engage in critical analysis of issues that are
germane to your charitable and educational purposes, or
* To allow a person to further develop their knowledge and skills with respect to issues within your mission
and which will enable them to utilize their improved skillset with the public at large.

Given your broad mission, the exact anticipated grants are not specifically identified. They will, however, fall
within your "portfolios" such as criminal justice, education, local issues, etc. The nature of the grants will vary
from portfolio to portfolio and may include:

* Development of educational tools to improve educational opportunities for all children and to build
educational excellence, evaluation of success (or failure) of alternative education systems, and

* Projects to promote systemic, data-driven understanding with respect to state and local criminal justice
issues, including reform of the cash bail system, the disproportional effect of fines and penalties, and the long
term effects of facially neutral policies that are applied in an unequal manner.

Grant amounts will be y dollars. You will disseminate information about this program via a broad solicitation to
appropriate audiences and include a description on your website. The pool of eligible applicants will consist of
persons who have an established knowledge base but wish to expand and further develop that knowledge
through specialized inquiry and those who have already demonstrated knowledge, skill, experience, training, or
education in an area within your mission and who seek to apply that knowledge for a specified project or study.
Those interested will submit information in regard to their individual qualifications (transcript, resume, a
written application, and letters of reference from those of expertise in the applicant's field). The written
application will require a narrative description of interest, areas of interest for research, potential impact on the
broader community, and how the applicant's work furthers your mission. The selection process will involve
predetermined, objective, and nondiscriminatory criteria. Individuals who pass the initial application process
will be interviewed regarding their professional work and its impact, research interests, and how it aligns with
your mission. Applicants will also be evaluated on education, life experience, personal goals, anticipated

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

knowledge development and its impact, uniqueness of the project, history of success, alignment with your
mission, etc.

Individual grant funds will be paid directly to the recipient. At the end of the grant period, the recipient will be
required to provide a written report about activities, progress, and use of funds. If you make an individual grant
for a period that exceeds one year, periodic written reports providing such information will be required at least
annually. Upon completion of the undertaking for which the grant was made, a final report must be provided
describing the accomplishments with respect to the grant and accounting for the funds received. If an individual
recipient does not account for all funds, any unaccounted funds must be returned to you for use in furtherance of
the charitable purposes of the initial grant.

Scholarship and Individual Grant Program:
There is no fixed number of grants expected annually. Rather, grants will be evaluated based upon perceived
need for educational development of current or long-term issues within your mission or based upon facilitating
non-partisan critical analysis of issues within your mission.

Grantees are subject to the approval of your board of directors. In some cases, your board will directly review
grant applications or nominations and select recipients. In other cases, your board may appoint a selection
committee comprised of directors and/or experts in their fields to review the applications and select finalists.
For example, your executive leadership responsible for your various portfolios would likely be committee
members. Grant candidates may not be related to a member of the selection committee or your board of
directors, nor anyone whose selection would benefit a selection committee member or board member.

You may consider grants of any duration and will evaluate the nature of the proposed objectives within the
context of the proposed project time frame. Funds may be granted annually and will be based on annual reviews
with the individual. If it appears beneficial to extend the initial grant period, you will consider renewing.

You will promptly investigate any apparent misuse of grant funds or failure to provide required reports. While a
matter is being investigated, you will withhold further payments on the grant until you have determined that no
part of a grant has been misused and until missing reports have been submitted. If you discover that funds have,
in fact, been misused, you will take all reasonable and appropriate steps to secure the repayment of the diverted
funds. In addition, if such a diversion occurs where installment payments are being made on a grant, you will
withhold any further payments until you have received assurances from the recipient that future diversions will
not occur and has required the recipient to take extraordinary precautions to prevent future diversions from
occurring. All remaining funds will be used for your charitable purposes.

If and when you conduct activities or provide grants/goods/assistance to individuals in foreign countries, you
will check the OFAC list of SDNs and Blocked Persons. You have a written anti-terrorism policy and will
comply with all U.S. statutes, executive orders, and regulations that restrict or prohibit U.S. persons from
engaging in transactions and dealings with designated countries, entities or individuals or otherwise engaging in
activities in violation of economic sanctions administered by OFAC. You will acquire the appropriate license
and registration where necessary.

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

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.

IRC Section 4945(g)(1) Requirements:

* 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).

IRC Section 4945(g)(3) Requirements:

* 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 IRC Section 117(a) and is to be used for study at an educational
organization described in IRC Section 170(b)(1)(A)(ii).

- A prize or award subject to the provisions of IRC Section 74(b), if the recipient of the prize or award is
selected from the general public.

- To achieve a specific objective; produce a report or similar product; or improve or enhance a literary,
artistic, musical, scientific, teaching, or other similar skill or talent of the recipient.

To receive approval of its educational grant procedures, Treasury Regulation Section 53.4945-4(c)(1) requires
that a private foundation show:

* The grant procedure includes an objective and nondiscriminatory selection process.
* The grant procedure results in the recipients performing the activities the grants were intended to finance.
* The foundation plans to obtain reports to determine whether the recipients have performed the activities that
the grants were intended to finance.

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

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.

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