College-readiness scholarship procedures approved

Plain-English summary

A private foundation asked the IRS to pre-approve its scholarship procedures. Under section 4945, a private foundation's grants to individuals for study are "taxable expenditures" that trigger an excise tax unless the IRS approves the award procedures in advance under section 4945(g)(1). This foundation awards grants to graduating high school seniors who have at least a 3.0 GPA, took part in a college-readiness program, and qualify for a Pell Grant, to help them pursue postsecondary degrees. Applicants submit a recommendation letter and a creative presentation about overcoming an obstacle; an outside application manager screens and scores them, and the foundation's committee makes final picks for the trustees. Grants are paid directly to the schools after proof of enrollment and can be renewed for up to four years for students in good standing. The IRS approved the procedures, so grants made under them are not taxable expenditures as long as the program runs as described, and the awards are tax-free scholarships to recipients under section 117 when used for qualified expenses.

Ruling snapshot

• Question: Do the foundation's college-readiness scholarship procedures satisfy IRC § 4945(g)(1) so the grants are not taxable expenditures?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)(1)

Full text (IRS public release)

Internal Revenue Service
Tax Exempt and Government Entities Taxpayer ID number:

IRS P.O. Box 2508

Cincinnati, OH 45201

Department of the Treasury Date: 08/10/2022

Person to contact:
Number: 202244028
Release Date: 11/4/2022
LEGEND UIL: 4945.04-04

W = Scholarship Program
X = Number of Grants

Y = Application Manager
z dollars = Grant 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 grant program called the W.

The purpose of the W is to support the educational advancement of youths by providing grants to graduating
high school seniors who plan to pursue postsecondary degrees at accredited educational institutions. You

anticipate awarding approximately X grants worth z dollars each; however, the actual number and amount of
grants will vary based on annual reviews of your available resources.

To advertise your program, you will use social media, your website, and email lists, which will include the

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

emails of various high school counselors.

To be eligible, applicants must be high school seniors with a cumulative GPA of 3.0 who participated in a
college readiness program during their last two years of high school and will qualify to receive a Pell Grant.

Eligible applicants must submit a completed application form, one recommendation letter from an academic
reference, and a presentation in any medium (e.g., art, video, essay, etc.) explaining how the applicant overcame
a challenging obstacle.

Y will manage the screening and scoring of your applications and provide this information directly to your
scholarship committee who will review the applications and make final recommendations to your trustees.
Selection criteria will include academic achievement, demonstrated leadership and character, an interview, and
participation in extracurricular activities and college readiness programs.

After proof of enrollment is provided, grants will be paid directly to the recipients' qualifying educational
institutions. Upon review by your foundation, grants may be renewed up to four years for recipients who
remain in good academic standing at their respective schools. If a recipient is not enrolled or not in good
standing, any remaining funds will be forfeited and returned to you. In addition, grants must be used within 12
months from the award notification date unless recipients are provided an extension.

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).

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

• 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