IRS approves a foundation's scholarship procedures for disadvantaged children abroad

Plain-English summary

A private foundation asked the IRS to approve, in advance, how it will award
scholarships. Under Section 4945, a foundation's grants to individuals for
study are normally "taxable expenditures" that trigger an excise tax, unless
the IRS pre-approves the grant procedures under Section 4945(g). This
foundation runs a scholarship program for impoverished children attending an
accredited school in a particular country, covering tuition, books, and room
and board. Teachers or parents apply on the child's behalf, and the foundation
interviews applicants by video call, sends awards directly to the school, and
makes twice-yearly onsite visits to check on performance. The IRS found the
selection process objective and nondiscriminatory, with insiders' relatives
excluded, so the procedures meet Section 4945(g)(1). As a result, the grants
are not taxable expenditures, and because they are scholarships under Section
117, they are also tax-free to the students when used for qualified tuition and
related expenses.

Ruling snapshot

• Question: Do the foundation's scholarship procedures qualify for advance approval under IRC 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC § 4945(g)(1); IRC § 4945(d)(3); IRC § 117(a)-(b); IRC § 170(b)(1)(A)(ii); Rev. Rul. references per Letter 4792

Full text (IRS public release)

Department of the Treasury                          Date: 06/13/2024
Internal Revenue Service
Tax Exempt and Government Entities
P.O. Box 2508
Cincinnati, OH 45201                                Taxpayer ID number:

                                                    Person to contact:
                                                      Name: Mrs.
                                                      ID number:
Release Number: 202425018                           Telephone:
Release Date: 6/21/2024
LEGEND UIL: 4945.04-04

X = Country
y dollars = Dollar Range

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 an educational scholarship program for impoverished children
attending an accredited school in X. The total amount of annual scholarship grants will be approximately y
dollars. These funds can be used to cover tuition, books, room and board. You will keep records of each
recipient including names, addresses, purposes of awards, amount of each grant, and manner of selection.

The scholarships will be available to disadvantaged children living in tribal or downtrodden communities in X.
Applications can be submitted by the teachers or parents of the child. The application will include a short
essay of why they want to pursue education. Information about parents' background and income, in addition
to student's past school attendance and performance must be submitted. Video calls will be made to interview
possible recipients and to assess the amount of funding to be awarded.

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

Once a recipient is selected the scholarship awards will be sent to the school. The recipient must maintain
regular attendance and meet the school's academic quality standards. You will make onsite visits twice a year to
assess student's performance. You will maintain all records relating to individual grants, including information
obtained to evaluate recipients, identify whether a recipient is a disqualified person, establish the amount and
purpose of each grant. If the terms of the awards are violated, no further grants will be made to that student. If a
school fails to satisfy requirements, no further grants will be made to help students attending that school.

Your board members will be your selection committee. Relatives of members of the selection committee, or of
your officers, directors, or substantial contributors are not eligible for awards made under your scholarship
program.

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.

Insert if the organization made grants prior to receiving advance approval.
+ The effective date of our approval is          , which is the date your request was submitted.

+ 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