Need-based scholarship procedures received advance approval

Plain-English summary

A private foundation proposed need-based scholarships for students from underserved communities attending college, university, community college, or a post-high-school trade school. Eligibility considered the student's school, enrollment, recommendation, essay, financial need, academic record, and whether the student would be the first in the family to attend college. Trustees would select recipients, payments would go directly to educational institutions, and renewals required reapplication and satisfactory academic standing. The foundation also committed to recordkeeping, annual review, investigation of diverted funds, recovery efforts, and withholding further payments when needed. The IRS approved the procedures under Section 4945(g)(1), so compliant awards would not be taxable expenditures and could be excluded by recipients when used for qualified tuition and related expenses within Section 117(b).

Ruling snapshot

• Question: Did the foundation's need-based scholarship procedures satisfy the advance-approval rules for grants to individuals?
• Outcome: approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(d)(3), 4945(g)(1)

Full text (IRS public release)

Internal Revenue Service

Tax Exempt and Government Entities
P.O. Box 2508

Cincinnati, OH 45201

Department of the Treasury Date: 04/12/2023

Taxpayer ID number:

Person to contact:
Name:
ID number:

Release Number: 202327021 Telephone:

Release Date: 7/7/2023

LEGEND UIL: 4945.04-04
B = number

C = number

D = Local Non-Profit 1

E = City

F = Local Non-Profit 2

G = City

H = school

x dollars = $

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 to provide need-based educational scholarships for
individuals. The purpose of your program is to help students in underserved communities pay their cost of
room, board, and tuition while attending a college or university, or post-high school trade school.

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


You anticipate awarding approximately B grants per year worth in between x dollars, for the first several years
of the program. Your goal is to increase the number of scholarships awarded to approximately C annually, as
funding allows.

You will publicize your program in local charities that provide assistance to students in underserved
communities, such as D in E, and F in G. You will also advertise in high schools in low-income communities in
the E area, such as H.

To be eligible for your program, first time applicants must:

• Be students and graduates of high schools located in underserved communities in E,

• Be entering or currently enrolled full-time at a 2-year community college or 4-year college/university or trade
school,

• Provide a letter of recommendation from his/her school counselor, teacher, mentor, or someone from an
outside charitable, educational, or religious organization that can speak to the applicant's character,

• Write an essay describing their purpose for applying, their career goals, and any other special circumstances
that makes their situation unique.

Your selection criteria will be the same as those used to determine eligibility, with preference based on financial
need and the unique characteristics of the applicant. You will also give preference to those students who are the
first in their family to attend college. You will consider the applicants grade point average, personal essay, and
letters of recommendation.

You will determine financial need by having applicants submit a copy of their Free Application For Student Aid
(FAFSA) and a list of any scholarships that have been awarded to the applicant. You may request copies of the
applicants and/or parents federal tax return if appropriate.

Recipients may be eligible to renew their scholarships if the maintain a minimum 2.0 grade point average (or
the equivalent if the school or program does not use a grade point average based on a 4.0 scale). However,
renewals will require the recipient to reapply for the scholarship.

Your selection committee consists of your trustees. The trustees will review the applications and determine the
recipients and the amount of each scholarship award, taking into account the number of scholarship applicants,
their financial need, and your financial resources.

Funds will be paid directly to the educational institution at which the recipient will be attending. You do not
anticipate that formal reporting will be necessary, but you will request confirmation from the institution that the
scholarship recipient is in good standing at the school prior to awarding the scholarship. You will require
recipients submit a copy of their transcript at the end of the semester (or similar grade reporting period) to
determine if the recipient has maintained the required grade point average, and you will request confirmation
that the student remains in good standing at the end of the applicable reporting period. Students who have not
met these requirements will not be eligible for a scholarship renewal.

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.

• 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.

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


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