Business-major scholarship procedures approved

Plain-English summary

A private foundation asked the IRS to pre-approve the procedures for a scholarship program aimed at low-income, high-achieving students. 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 funds students from low-income regions who are entering an accredited college as first-year freshmen to major in business fields such as accounting, finance, marketing, computer science, actuarial science, or real estate. Eligibility turns on class rank, financial need, and academic standing; the awards cover a capped share of tuition, are paid directly to the schools, and can be renewed for up to three more years if the student keeps a 3.25 GPA. A selection committee of board members and at least one independent member picks the winners, and insiders and their relatives are excluded. 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 business-major 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)

Department of the Treasury Date: 08/10/2022
Internal Revenue Service

Tax Exempt and Government Entities Taxpayer ID number:
P.O. Box 2508
Cincinnati, OH 45201 Person to contact:
Name:
ID number:
Number: 202244030 Telephone:

Release Date: 11/4/2022

LEGEND UIL: 4945.04-04

D = State 2

E = State 3

F = Organization

y 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 scholarship program. The purpose of your program is to provide
awards to financially constrained, high achieving and deserving men and women to study at an accredited
college or university, in a business subject of their choice.

Your scholarship program will be publicized on your website and through the guidance counselors at private
and public high schools. You intend to target schools in urban, suburban, and rural areas that are specifically in

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

low-income regions. Currently, you are focusing on the states of C, D, and E and more states will be included

in the future. At least out of every candidates selected must be graduating from a public high school
located with a U.S. municipality, town, or city with a population of over persons.

You anticipate to award in the range of B scholarships annually. The scholarship will cover no less than and no more than % of annual college tuition amount, excluding room and board. The current amount is in
the range of y dollars. Grants will be disbursed directly to the educational institutions.
To be eligible for the scholarship, the student must complete an application on your website and:

• Be a graduating high school senior who is in the top % of the graduating class or equivalent measure
  as determined by the respective high school
• Be entering an accredited college or university as a first-year freshman during the same calendar year as
  high school graduation
  [illegible]
• Be a full time and fully matriculated undergraduate students pursuing a bachelor's degree

• Be major in accounting, finance, marketing, computer science, actuarial science, or real estate, and be in
  good academic standing

• Demonstrate financial need with a % tuition or less "parental contribution" as defined by F or
  household income less than % of the U.S. median income as defined by Federal guideline per region

The scholarship is an annual award and renewable for up to three succeeding years. Preference is given to prior
year recipients as long as he or she consistently fulfills all criteria for the original scholarship requirements and
has achieved a 3.25 cumulative overall grade point average.

Your selection committee consists of members of your Board of Directors and at least one independent person
with at least years of academic experience at or above high school or upper school level. Members of the
selection committee will not be in a position to receive private benefit, directly or indirectly. Recipients cannot
be related to a member of the selection committee or to any disqualified persons. Your employees and their
family members are not eligible to apply. Membership replacement will be the responsibility of your Trustees.
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.

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

• 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.
  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