Scholarship procedures for members' children received advance approval

Plain-English summary

A private foundation proposed scholarships for children of members of a statewide society who attend undergraduate or graduate programs. Applicants must meet academic, enrollment, Selective Service, transcript, and essay requirements, and relatives of the foundation's leaders and selection committee members are ineligible. The foundation will pay schools directly, require annual reapplication, monitor academic performance, and recover funds when a recipient withdraws or fails to attend. The IRS approved the procedures under Section 4945(g)(1), so grants made as proposed will not be taxable expenditures. Scholarship funds used for qualified tuition and related expenses also will not be taxable to recipients, subject to Section 117(b).

Ruling snapshot

• Question: Do the foundation's proposed scholarship procedures satisfy the advance-approval requirements of IRC § 4945(g)(1)?
• Outcome: Approved, provided the program operates as described
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(d)(3), 4945(g)(1)

Full text (IRS public release)

Department of the Treasury                                            Date:
Internal Revenue Service                                               02/05/2024
Tax Exempt and Government Entities                                    Taxpayer ID number:
P.O. Box 2508
Cincinnati, OH 45201                                                  Person to contact:

Release Number: 202418015
Release Date: 5/3/2024

LEGEND                                                                         UIL: 4945.04.04
W = Society
X = 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 scholar ship 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 program to provide scholarships to children of members of the W of the
State of X to attend an undergraduate or graduate program at an educational institution.

You will publicize the scholarships to members of the W of the State of X and made available on your website.
Your Scholarship Committee will determine the number and amount of scholarship awards based on availability
of funds.

All applicants must be a child of a member of the W of the State of X. The member must submit the application
on behalf of his or her child, and such member must be a member in good standing of the W of the State of X.

Applicants must satisfy the following eligibility criteria:

1. Have a minimum 2.0 GPA,
2. Attend an accredited college or university and be considered a full-time student in an undergraduate or
graduate program,
3. Have registered for the Selective Service, to the extent the applicant is a male at least 18 years of age, and
4. Submit an official transcript and essay relating to the history of W.

The application will then be reviewed by your Scholarship Committee. Members of your Scholarship
Committee must be members in good standing of the W of the State of X. Relatives of members of your
selection committee, or of your officers, directors, or substantial contributors are not eligible for awards.

In awarding scholarships, you will give priority to students attending an undergraduate program for the first
time and children of members who are actively involved in W. The scholarship recipient needs to maintain at
least a GPA of 2.0. If the recipient’s first semester grades are below a 2.0 GPA, the funds for the second
semester must be returned to you.

You allow recipients to receive scholarship awards in multiple years, but they must reapply annually under the
general application process. Each recipient may receive a maximum of 6 annual scholarship awards, with a
maximum of 4 scholarship awards to be used for undergraduate studies.

You will distribute the scholarships directly to the recipient’s school. In the event the recipient withdraws from
or does not attend the school, the funds must be returned to you.
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.
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