IRS pre-approves a foundation's bank-administered college scholarship program

Plain-English summary

A private foundation asked the IRS to approve, in advance, the way it plans to
award college scholarships. This step matters because grants a private
foundation makes to individuals for study are normally "taxable expenditures"
that trigger an excise tax under section 4945, unless the IRS has approved the
scholarship procedures ahead of time under section 4945(g). The program is run
with the help of an outside administrative service and a bank trustee, uses an
online application, and selects graduating high-school seniors and graduates
from a particular area on the basis of financial need, academic standing, and
plans to attend an accredited U.S. school full-time. The selection is
competitive, objective, and nondiscriminatory, and relatives of insiders are
barred from receiving awards. The IRS approved the procedures under section
4945(g)(1), so the scholarships will not be taxable expenditures, and it noted
that the awards are tax-free to recipients under section 117 to the extent used
for qualified tuition and related expenses.

Ruling snapshot

• Question: Do the foundation's scholarship-award procedures qualify for advance approval under section 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC § 4945(g)(1); IRC § 4945(d)(3); IRC § 117; Treas. Reg. § 53.4945-4

Full text (IRS public release)

Department of the Treasury Date:

Internal Revenue Service 04/24/2023

Tax Exempt and Government Entities Taxpayer ID number:
IRS P.O. Box 2508

Cincinnati, OH 45201

Person to contact:

Release Number: 202329012
Release Date: 7/21/2023

LEGEND | UIL: 4945.04-04

B = company
‘C= bank

D = city/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 scholarship program. An external service, B, will facilitate and provide
administrative support in servicing the scholarship. They will work with your trustee, C, in doing so. B will
prepare a marketing plan specific to the scholarship to include a personal contact with the school(s) or other
contacts who will receive the promotional materials, and to discuss the most appropriate method(s) to reach the
students. School contacts will receive an annual letter, with notification of important program dates, a FAQ
document which contains all the relevant program information, as well as program marketing materials.
Program marketing can include flyers, scholarship information sheets, public announcements, and postings with

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

a list of available scholarships. All marketing materials will be reviewed and approved by C's scholarship
administrator prior to sending.

B will follow up with C if sufficient qualified applications have not been received within three weeks of the
dateline to discuss adding to or expanding the marketing plan in order to reach additional qualified candidates.

B will advise students if their applications are incomplete and more information is required. C will also be
advised of incomplete application within three weeks prior to the application dateline. Incomplete applications
that are completed within two weeks of the application deadline may be accepted in the discretion of the trustee
or external selection committee, as applicable.

The online application and information pertaining to the application process will be available at C's website.
The online application date ranges between February and May of the current funded year.

The initial selections will be based on the eligibility criteria as follows: (a) a graduating senior or graduate of a
high school in D, (b) demonstrate financial need, (c) be in good academic standing, and (d) be planning to
attend full-time at an accredited college, university, technical, trade or professional school, located in the United
States.

C has sole discretion to select scholarship recipients and determine scholarship amounts. You will review the
scholarship candidates and provide C with recommendations and a ranking spreadsheet.

The following applicants/recipients are ineligible to apply for or receive any scholarship from your organization
under any circumstances:(a) any Interested Person (which term includes, for the purposes of this document, any
donor, trustee, selection committee member, advisory board member, your staff members, and those otherwise
deemed to be "disqualified persons" under the Internal Revenue Code), (b) the spouses and ancestors of
Interested Persons, (c) the children, grandchildren, and great-grandchildren of Interested Persons, (d) the spouse
of any child, grandchild, or great-grandchild of an Interest Persons, and (e) current employees of B and C and
their spouses, ancestors, children, grandchildren, great-grandchildren and the spouses of such children, .
grandchildren, and great-grandchildren.

B will review the applications and identify applicants who do not meet the eligibility requirements. Information
for ineligible candidates will not be provided to the committee.

B shall give consideration to the respective ability, academic merit, educational goals, career ambitions, and the
relative financial need of the applicants. This is a competitive scholarship program. Scholarships shall be
awarded on an objective and non-discriminatory basis, with neither race, creed, color, sex, age, religion,
national origin nor disability being considered. Selections are based on information received from the
application and the additional materials received by the deadline. B will select two or three alternative
recipients. Decisions of C are final and justification for recipient selection(s) by B or C will not be. disclosed
under any circumstances.

Once final approval has been given by C, B will send award letters to the recipients with detailed information
about the scholarship. Candidates not selected to receive awards will also be notified by B via email.

The recipients may attend any accredited college, university, technical, trade or professional school, located in
the United States, in any field of study leading to a degree, diploma or certificate, provided the institution meets
the criteria in the following paragraph. Recipients must be enrolled full-time each semester and working
towards a certificate, undergraduate, graduate, post-graduate degree, etc. .

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

The number of recipients and the amount of each scholarship may vary from year to year due to fluctuations in
the Fund's value and/or applicable document restriction. Renewal of a scholarship award is not guaranteed.
Subject to the trust terms, the awards will be applied to the cost of tuition, fees, books and supplies, and should
not exceed these costs. Scholarship awards must be used in the year they are awarded.

The scholarship is for one year only. However, current recipients may reapply and be considered for additional
funding along with other new application. Scholarship recipients must be enrolled full-time. Scholarship
recipients are limited to four years of scholarship award and are expected to have been enrolled consecutive
years during that time. The recipients are not guaranteed a scholarship, and scholarship amounts are not
guaranteed.

‘In the event of serious malfeasance, breach of educational institution's Student Code’ of Conduct, failure to
provide requested materials, or conduct involving moral turpitude, a scholarship may be terminated at any time
within the discretion of C, whose decision shall be final and binding. At the close of each annual scholarship, B
will provide a completed Summary Report.

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