Advance approval of a fire department foundation's memorial scholarship procedures under section 4945(g)

Plain-English summary

A private foundation asked the IRS to pre-approve how it awards scholarships, which private foundations must do under section 4945(g) to avoid an excise tax on grants to individuals. The foundation runs a merit-based memorial scholarship, named for a long-time member of a local fire department, for active members of that department and their immediate families. Applicants must be high school graduates pursuing further education (a certification program such as EMT or paramedic, technical college, or a four-year college), meet a grade point average requirement, and submit an application and essay. The IRS approved the procedures, so the grants are not taxable expenditures, and the awards are tax-free scholarships to recipients if used for qualified tuition and related expenses under section 117(b). Funds go directly to the school, insiders are excluded, and the approval carries the usual recordkeeping and reporting conditions.

Ruling snapshot

• Question: Do a foundation's memorial scholarship procedures for fire department members and their families qualify for advance approval under section 4945(g)?
• Outcome: Approved.
• Key authorities: IRC § 4945(g)(1); IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B).

Full text (IRS public release)

Date: 12/05/2022

                              Department of the Treasury
                              Internal Revenue Service                Taxpayer ID number:
                              Tax Exempt and Government Entities
P.O. Box 2508                                                        Person to contact:
Cincinnati, OH 45201                                                 Name:
                                                                     ID number:
                                                                     Telephone:

Release Number: 202309019
Release Date: 3/3/2023

LEGEND                                                               UIL: 4945.04-04
X = Local Fire Department
Y = Individual
b dollars = $
c dollars = $
d = number
f = number

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. You will be issuing merit-based scholarships to
eligible members and immediate family of X, a local fire department. Members must qualify for a state tax
incentive in order to be considered "active" and they must have been on the department for a minimum of d
years. Immediate family members include spouse and children of members.

Applicants must be a high school graduate pursuing post-high school education by attending a certification

program (i.e., EMT, Paramedic, etc.), technical college, four year college, etc. They must have a cumulative
grade point average of 2.5 or greater before any subsequent awards are granted.

Selection will be based on the completion of an application, a two-page essay explaining why the applicant
should be awarded the scholarship, their goals and how their educational pursuit will assist them in obtaining
their goals.

Subsequent requests from applicants must include a written request for an additional award and a description of
how the previous award helped them with their educational goals.

Selection of scholarship recipients will be based on characteristics of Y that are exhibited by applicants. Y was
a long-time member of the department.

No member or immediate family member of the board of directors or of the scholarship selection committee
will be eligible for the scholarship program.

You expect to award up to f scholarships per year with awards ranging from b dollars up to c dollars.

Funds will be distributed directly to the educational institution the recipient is attending. Applicants are

required to submit documentation showing their GPA and a letter explaining how the award has been used to
help them accomplish their goals.

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 scholarship 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 scholarships 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 scholarship
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