IRS approves a foundation's scholarship procedures for underprivileged children's primary and secondary education

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 runs a scholarship program (referred to as "X") that funds primary and secondary education for underprivileged children in a particular location. Volunteer nominators who are natives of that location identify candidates and help them apply, evaluators assess merit and need, and the governing body makes the final award on an objective, nondiscriminatory basis. Applicants (and their relatives) who are related to or have an economic interest with a nominator, evaluator, officer, or board member are automatically ineligible. Funds are paid directly to the school (or to vendors for other qualified expenses), the awards may not exceed a set amount per year, and the foundation keeps detailed records and recovers any diverted funds. 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

Tax Exempt and Government Entities
P.O. Box 2508

Cincinnati, OH 45201

Department of the Treasury Date: 05/17/2023

Taxpayer ID number:

Person to contact:

Name:

ID number:
Number: 202332022 Telephone:
Release Date: 8/11/2023
LEGEND UIL: 4945.04-04

X = Scholarship Program
Z = Recipient Location
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, called X, to
provide funding for primary and secondary educational pursuits to underprivileged children in Z.

The criteria used for selecting recipients of X shall include but is not limited to:
1) prior academic performance, performance of each applicant on tests designed to measure ability and aptitude

for educational work; recommendations from instructors of such applicant and any others who have knowledge
of the applicant's capabilities; and

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

2) additional biographical information regarding an applicant's personal, family, academic and other relevant
experiences, financial need, and conclusions which the nominators, evaluators and your governing body may
draw as to the applicant's need, motivation, character, ability, or potential.

Recipients are selected on an objective and nondiscriminatory basis. You will seek volunteer nominators to
identify eligible candidates. The nominating volunteers shall be natives of Z appointed by your president. The
nominators will seek out and identify potential candidates as well as help the candidates complete the
scholarship application. Following submission of the application, the candidates will be assessed by evaluators
chosen by your president. The evaluators will measure a candidate's qualifications, including need and merit.
Following the completion and recommendation of the evaluator, the candidate's application and evaluation will
be submitted to your governing body for approval. The governing body may reach out to the nominator or
evaluator for further information in making its decision. No candidate, or relative of a candidate shall be related
to or have any economic interest to a nominator, evaluator, officer or board member, or family member thereto.
Any candidate with any said relationship to any of those individuals shall automatically be ineligible for said
scholarship.

X must be used to fund tuition and qualified educational expenses (including room and board) at an educational
institution in Z. The recipients will be chosen on the basis of merit and need. X will ordinarily be awarded for a
one-year period but may be for a shorter or longer period. The amount granted will not exceed y dollars in any
given year or instance. X is renewable on a case-by-case basis.

Unless otherwise provided X shall be paid directly to the educational institution for the use of the recipient.
Each educational institution must agree, evidencing in writing (receipt or school records sufficing), to use the
funds to defray the recipient's expenses of enrollment. Other qualified expenses not covered by the educational
institution shall be paid directly to the vendor of said qualified expense. In the case where the recipient
purchases an item that is a qualified expense, a receipt shall be submitted to you for reimbursement. An
additional condition is that no part of X shall be used as payment for teaching, research, or other services by the
recipient required as a condition for receiving the funding.

If you learn that all or any part of X is not being used in furtherance of the charitable purposes or for expenses
not outlined herein, you shall take all reasonable and appropriate steps to recover the funds. In such case, you
will withhold further payments until: (1) the funds are in fact recovered; (2) you have received the recipient's
assurances that future diversions will not occur; and (3) you require the recipient to take extraordinary
precautions to prevent future diversions from occurring. The phrase "all reasonable and appropriate steps," as
used above, shall include legal action where appropriate, but need not include legal action if such action would
in all probability not result in the satisfaction of execution on a judgment. Records pertaining to X shall be kept
for no less than three years after the filing of your annual tax return for the period in which the last installment
of X was paid.

You will retain the following records in connection with X:
1) all information obtained to evaluate the qualifications of potential recipients,

2) any additional information you obtain in complying with your administration procedures including but not
limited to the amount of the X, the expenditures of X, and the receipts thereof.

3) information pertaining to unsuccessful applicants for awards shall be kept along with information on
successful applicants.

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


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.

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