Advance approval of scholarship procedures for gifted, underprivileged students

Plain-English summary

A private foundation asked the IRS to pre-approve the way it will award college and graduate-school scholarships. Because a private foundation that makes grants to individuals for study normally owes an excise tax under Section 4945, it needs advance IRS approval of its procedures under Section 4945(g). This foundation gives need-based scholarships to gifted, underprivileged students who live in or attend school in certain counties of one state, selecting recipients on financial need, academic performance, transcripts, recommendations, a personal statement, and an interview. Payments require yearly progress reports and transcripts, insiders' relatives are excluded, and funds can be recovered if misused. The IRS approved the procedures as objective and nondiscriminatory. As a result, the grants will not be taxable expenditures for the foundation, and the awards are tax-free scholarships to recipients who use them for qualified tuition and related expenses (subject to Section 117(b)). The approval applies only to this foundation and only if its facts and procedures do not change significantly.

Ruling snapshot

• Question: Do the foundation's scholarship-award procedures qualify for advance approval under IRC § 4945(g)(1)?
• Outcome: approved
• Key authorities: IRC §§ 4945(d)(3), 4945(g)(1), 117, 170(b)(1)(A)(ii)

Full text (IRS public release)

Department of the Treasury                                   Date: 03/21/2024
Internal Revenue Service

Tax Exempt and Government Entities                           Taxpayer ID number:

P.O. Box 2508
Cincinnati, OH 45201                                         Person to contact:
                                                             Name:
                                                             ID number:
Release Number: 202424025                                    Telephone:
Release Date: 6/14/2024
LEGEND                                                       UIL: 4945.04-04

B = Counties
C = State
X = Number of Grants

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 program to award scholarships to gifted, underprivileged students in the
counties of B in the state of C. Scholarship funds will be used to defray the costs of full-time or part-time
undergraduate or graduate-level study at a qualified educational institution. Scholarship funds will be awarded
on a non-discriminatory and objective basis. High school or college students whose permanent residences are in
the counties of B, or are enrolled in school or plan to matriculate at a school located in the counties of B, who

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

are in need of financial assistance to defray the cost of attending college or graduate school will be eligible for
your program. Grants will only be awarded to actively matriculating students who show potential for success.
No individual will be permitted to receive grant funds if he or she has any relationship with a disqualified
person as to your organization, or any individual with the power to make a grant selection.

Grant recipients will be selected based on financial need, academic performance and potential (evidenced, in
part, by official transcripts), recommendations from instructors, the submission of a personal statement, and an
interview by your selection committee of the individual (and potentially his or her family). In order to
substantiate the individual's financial need, grant candidates may be asked to provide information consistent
with that requested in the Free Application for Federal Student Aid (FAFSA).

You will award such number of grants deemed appropriate per year, making the decision to award funds on the
basis of the quality of the applicant in any particular year (as opposed to a predetermined number of awards).
Currently, you do not anticipate awarding more than x scholarships per year.

The amount of each grant will be tailored to the extent of the financial need of the grantee, as you determine on
a case by case basis depending on funding already received by the individual from other sources. You will
publicize the availability of your scholarships primarily through schools in the areas of the counties where
grantees are expected to matriculate, as well as through websites that maintain databases of similar scholarships.

In your sole discretion, grants may or may not be renewed. If a grant is renewed, the grantee will be required to
provide a transcript, proof of ongoing enrollment, and a progress report. At the conclusion of every academic
year, each grant recipient will be required to submit a progress report setting forth how the granted funds were
used and providing an official, verified transcript showing proof of academic performance (including courses
taken and grades received). In the event these reports are not made, you will investigate (and, during such
investigation period, will make no further payments to the grantee) and, if necessary, take all reasonable
corrective action, which may include an attempt to recover any misused funds or ensure the restoration of
diverted funds. Further, to the extent that funds are used for purposes other than those for which they were
granted, an individual will become ineligible to receive additional grants.

Your initial selection committee will be composed of your two sole directors. Acting jointly, they will have the
power to appoint additional members of the selection committee, as well as remove, replace, and designate
successors to such individuals. Your directors may solicit nominations for grants from highly-qualified
educators and other professionals in the educational field. Neither director will receive any benefit from the
award of any scholarship, nor will any future member of the selection committee or any of your disqualified
persons.

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.

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

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.

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

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