IRS pre-approves a firm foundation's diversity scholarship for future CPAs

Plain-English summary

A private foundation asked the IRS to approve, in advance, the way it plans to
award 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 awards a set number
of non-renewable scholarships each year, paid directly to the school, to
first- and second-year college students pursuing an accounting degree with CPA
eligibility, aimed at students from diverse racial and ethnic backgrounds,
LGBTQ individuals, military veterans, and people with disabilities. Selection is
based on academic achievement, leadership, activities, and communication
skills, and relatives of selection-committee members are walled off from the
process. The IRS reviewed the procedures and the foundation's oversight and
record-keeping commitments and approved them under section 4945(g)(1), so the
scholarships will not be taxable expenditures. The awards are also 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: 202330011
Release Date: 7/28/2023

LEGEND UIL: 4945.04-04
B = Scholarship Program

C = Number of scholarship annually

D=GPA

E = Selection Committee

y dollars = $amount

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. There will be C scholarships awarded each year. All awards will be for

y, which is paid directly to the school in the student's name. Scholarships are not renewable. The student must
be in their first or second year of college and pursing a degree and career in accounting. The scholarship is
intended for students from diverse racial and ethnic backgrounds, LGBTQ individuals, military veterans, and
people with disabilities.

You will promote the scholarship opportunity on campus through faculty outreach and student organizations

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

along with your website. All applications must be submitted on your website and include a resume and
unofficial transcript. Applicants must have three or four years remaining in their coursework pursuing a
bachelors degree with CPA eligibility in accounting or a related field and have a grade point average of D or
higher.

The factors considered by the selecting committee are

- Academic Achievement,

- Demonstrated Leadership Skills,

- Extracurricular Activities, Particularly Leadership Roles in Diversity Organizations,
- Effective Communication Skills.

The campus recruiting team will select and interview qualified candidates. The team will then present their
selections to the firm's talent acquisition leader who will take the list to the E for review and approvals. If an
applicant is related to someone from the selection committee, the employee will not be involved in the interview
or scholarship selection process.

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.

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

* 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.
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