IRS approves a foundation's scholarship procedures for low-income students in a partner program

Plain-English summary

A private foundation asked the IRS for advance approval of its scholarship procedures under section 4945(g)(1). Without this approval, a private foundation's grants to individuals for study can be "taxable expenditures" subject to excise tax under section 4945. The foundation plans to award scholarships to graduating students who participate in a particular program (referred to as "Z"), aimed at helping deserving students from low-income families attend college. The program's board nominates candidates, the foundation's board makes final selections on an objective, nondiscriminatory basis using academic leadership and community-engagement criteria, relatives of the foundation's directors are excluded, and funds go directly to renewable recipients who stay in good standing. The IRS approved the procedures, finding they meet the requirements of section 4945(g)(1). As a result, grants made under these procedures will not be taxable expenditures, and the awards are tax-free scholarships to recipients to the extent used for qualified tuition and related expenses under section 117. The approval is conditioned on running the program as described, supervising grants, keeping records, and not awarding grants to insiders or their relatives.

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; IRC § 170(b)(1)(A)(ii)

Full text (IRS public release)

Internal Revenue Service

Department of the Treasury Date: 05/17/2023
Tax Exempt and Government Entities Taxpayer ID number:

P.O. Box 2508
Cincinnati, OH 45201 Person to contact:
Name:
ID number:
Number: 202332020 Telephone:
Release Date: 8/11/2023
LEGEND UIL: 4945.04-04

B = Location of Recipients

Z = Participating Program

w scholarships = Number Granted
x students = Eligible Recipients

y dollars = Grant 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 a scholarship program for graduating students who are participants of Z.
The purpose of the scholarship is to provide financial assistance to deserving students from low-income families
to attend college. In the future, you intend to partner with other various charitable organizations in the B, but for
now are focused on those who participate with Z. In connection with this partnership, you intend to provide w
scholarships to graduating students each year in the amount of y dollars per year subject to the availability of
funds and the needs and number of selected students. Z currently serves x students per year, all of which reside
in B. All recipients are selected on an objective and non-discriminatory basis.

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


The current board of directors of Z identify and nominate any potential recipients for consideration of your
scholarship. Based on their recommendations, selections are then made by your board of directors. To be
eligible for a scholarship, the recipient must be a participant or a member of Z, and must be in good standing at
a high school in B. Also, recipients will have demonstrated strong academic leadership and community
engagement qualities. No relatives of your board of directors are eligible to receive your scholarship. The
scholarship will be publicized on Z's website and other social media.

You will disburse funds directly to the recipients and you have procedures in place to ensure that the funds are
used to further exempt purposes and for qualifying distributions. Specifically, you will arrange to receive a
report of the grantee's courses taken and grades received in each academic period annually. In addition, you will
investigate jeopardized grants, take reasonable and appropriate steps to recover the grant funds to insure the
restoration of the diverted funds and withhold any further payments to the grantee after you become aware that
a diversion may have taken place.

Your awards are renewable. To be eligible for renewal, recipients must remain students in good standing at their
perspective academic institutions and are required to continue to demonstrate financial, academic leadership and
community engagement.

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.

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