IRS pre-approves a foundation's scholarship program for students facing socio-economic barriers

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 funds
post-secondary students who face socio-economic barriers, using an online
application, an outside consultant to screen for eligibility, and a selection
committee that interviews finalists and sets award amounts. Scholarships are
paid directly to the school for tuition, with refund and reporting safeguards.
The IRS reviewed the selection process and the foundation's oversight and
record-keeping commitments and approved the procedures under section 4945(g)(1),
so the scholarships will not be taxable expenditures. It also noted 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 05/03/2023
Tax Exempt and Government Entities Taxpayer ID number:

IRS P.O. Box 2508
Cincinnati, OH 45201

Person to contact:
Number: 202330010
Release Date: 7/28/2023

LEGEND UIL: 4945.04-04
B = Scholarship Program

C = Country

D = City

E = Locations

G = Nationality

H = Nationality

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 B. The purpose of B is to support post-secondary students with socio-
economic barriers. B will be publicized through your website, social media, grantee partners, community
organizations supporting post-secondary students, place-based high school, and post-secondary institutions. The
number of scholarships and the amount of each scholarship will fluctuate each year based on your funding

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

commitments and minimum distribution requirements.
The selection process includes five steps:

¢ An online application submission.

* Consultant review of applications received, focused on eligibility criteria and completeness.
* Applications review by the selection committee.

¢ Interviews with the selection committee from final shortlist of applicants.

¢ Applicant selection process.

The application must be filed out on your website and attached documents uploaded for review.
Eligible applicants will meet the following geographic criteria:

* H eligible applicants will reside in C, with a preference for City of D residents.

° G eligible applicants will reside in E.

¢ Additional eligible applicants may be added in the future as you may choose to modify the geographic areas of
focus.

All applicants must have a specific GPA, pursuing undergraduate studies, and who face socio-economic barriers
due to race, ethnicity, sexual orientation, geography or personal trauma/ hardship. The application requires a
written recommendation provided by an applicant's supervisor, teacher, coach, mentor, or a community
organization. The applicant will also submit a video submission where they will speak to their strengths and
weaknesses, role models, achievements, education, and career goals.

The application packets are sent to a hired consultant to review and to select a shortlist of eligible applications.
Then the packets will be sent to the selection committee. The selection committee is composed of

consultants, one of your board members, and individuals from unrelated grantee and community partnership
organizations. The selection committee will interview the shortlist of applicants, select the recipients, and
determine the amount of the grant based upon the level of resources available.

The following requirements are imposed on scholarship applicants to obtain, maintain, or qualify for renewal of
a scholarships:

* Recipients must sign a scholarship and code of conduct agreement.

¢ Recipients must remain enrolled in an accredited post-secondary institution for a 2—4 year undergraduate
program.

* Eligible undergraduate programs include trade programs, diploma programs, and colleges and universities.

* Recipients will be required to complete an annual survey and provide a personal testimonial, including
description of use of the funds and experiences.

* Recipients will be encouraged to participate in your forthcoming scholar alumni program and your virtual
summit for scholars. Scholar and alumni participation in the program and virtual summit are intended to further
the leadership development of each participant and continue to build on their leadership qualities.

* Recipients must maintain a passing GPA, if a scholar fails a class, they can appeal to you to retake the class to
maintain their scholarship.

All scholarships will be paid to the educational institution as credit on the recipients account for tuition fees by
semester to help ensure the funds are expended for their intended purpose. The hired consultant will stay in
contact with the school. If a recipient does not use the scholarship, the consultant will request a refund from the

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

school for the remaining credit.

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

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