Scholarship procedures approved for low-income students

Plain-English summary

A private foundation sought advance approval for a scholarship program serving low-income current or former residents of a state, with a preference for people connected to one county. Awards would be based on financial need and merit and could cover tuition or living costs for students accepted at qualifying educational institutions. The foundation's board would select recipients, pay tuition awards directly to schools, and pay living-cost awards to recipients. It also promised annual reporting, recordkeeping, investigation of diverted funds, recovery efforts, and suspension of further payments when necessary. The IRS approved the procedures under Section 4945(g)(1), so grants made as proposed will not be taxable expenditures. Awards used for qualified tuition and related expenses may also be excluded from recipients' income under Section 117(b).

Ruling snapshot

• Question: Do the proposed need- and merit-based scholarship procedures satisfy the advance-approval rules for private-foundation grants to individuals?
• Outcome: Approved, subject to operating the program as represented
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(d)(3) and (g)(1)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
P.O. Box 2508
Cincinnati, OH 45201

Date: 03/06/2023
Taxpayer ID number:

Person to contact:

Number: 202322020
Release Date: 6/2/2023

LEGEND UIL: 4945.04.04
V = county

W = scholarship

x dollars = amount 1

y dollars = amount 2

Z = state

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 program called W.

You will provide education and cost-of-living grants based on both need and merit to individuals who are
current or former residents of Z, with a specific focus on current and former residents of V. The purpose of W is
to enable low-income Z residents to pursue educational opportunities in Z and elsewhere in the United States.

You plan to award or grants each year, between x and y dollars per recipient per year.

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

You will publicize the scholarships in V newspapers, on community announcement boards, through local
institutions, and Online.

To be eligible for grant an individual must (1) be either a former resident of Z with a preference given

to current or former residents of V, (2) be able to show a financial need for education and cost-of-living grants,
and (3) be able to show proof of acceptance to and attendance at an educational institution that maintains a
regular faculty and curriculum and normally has a regularly organized body of students in attendance at the
place where educational activities are carried on.

A complete application includes an application form plus the following documents: (1) a transcript from his or
her high school and if applicable, any higher educational institution attended (2) one letter of recommendation
from a teacher, professor, or counselor, (3) a statement of financial need, and (4) proof of residency.

You stated that your selection committee is comprised of your board of directors.

Scholarship funds will be distributed in one of two ways: (i) if the funds are to be used for payment of tuition,
the Corporation will distribute the funds directly to the post-secondary institution on behalf of the recipient; or
(ii) if the funds are to be used for cost-of-living support, the Corporation will distribute such funds directly to
the recipient in the form of a check.

You represent that you will complete the following: (1) arrange to receive and review grantee reports annually
and upon completion of the purpose for which the grant was awarded, (2) investigate diversion of funds from
their intended purposes, (3) take all reasonable and appropriate steps to recover the diverted funds, ensure other
grant funds held by the 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 diversions from occurring.

You represent that you will maintain all records related to the following: (1) individual grants including
information to evaluate grantees, (2) grantees which are identified as a disqualified person, (3) how the amount
and purpose of each grant was established, and (4) how you established supervision and investigation of the
grants described above.

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.

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

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
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.

We've sent a copy of this letter to your representative as indicated in your power of attorney.

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

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