Foundation's adversity scholarship procedures receive advance approval

Plain-English summary

A private foundation requested advance approval for scholarships benefiting high school students who overcame adversity and showed resilience and a desire to pursue college or graduate education. The program uses an objective, nondiscriminatory selection process, excludes foundation insiders and their relatives, pays the educational institution directly, and requires reports and follow-up on how funds are used. The foundation also committed to investigate diversions, recover misused funds, withhold further payments when necessary, and maintain detailed grant records. The IRS approved the procedures under section 4945(g)(1), so grants made under them will not be taxable expenditures. Awards are also tax-free to recipients to the extent used for qualified tuition and related expenses under section 117, subject to the letter's continuing conditions.

Ruling snapshot

• Question: Do the foundation's scholarship procedures qualify for advance approval under section 4945(g)(1)?
• Outcome: Approved, subject to operating the program as described and satisfying the stated safeguards
• 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 08/01/2024
IRS Tax Exempt and Government Entities Taxpayer ID number:

Person to contact:

Release Number: 202443026
Release Date: 10/25/2024

LEGEND
H = Numbers

J = Name

K = Location

x dollars = Amount

UIL: 4945.04-04

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 you will operate a scholarship program under IRC Section 4945(g)(1).
The purpose of the program is to award scholarships to high school students who have overcome adversity,
while demonstrating resilience and exhibiting a desire to grow through obtaining a college or graduate level
degree. The scholarships are to be used at a qualified educational institution for the recipient’s tuition expenses,
enrollment fees, books or supplies and equipment necessary for their course of instruction, at the institution
where they are enrolled. You will award in the range of H nonrenewable scholarships for x dollars. You will
publicize your program on your website and through emails pushed to students by J, the local school district.

Letter 4792 (Rev. 1-2022)

Catalog Number 58263T

The program is currently open to students who attend high school in J in K, who intend to obtain a college or
graduate level degree from a qualified college or university. In the future, you intend to expand the scope of
eligible students to include students attending other high schools in the metropolitan K area. Further, members
of the selection committee, your officers, directors, or substantial contributors or their relatives are not eligible
for awards.

To apply for your scholarships, eligible candidates must generally provide biographical information and submit
to you the name of the college they plan to attend as well as submit an essay that describes how they overcame
adversity, sharing an experience from which they learned an important lesson or gained a new perspective on
life. Candidates can either submit the documents directly on your website or email the documents to you.

All submissions will be reviewed by your selection committee consisting of your directors who will award
scholarships to the most deserving candidates on an objective and non-discriminatory basis. You may also
create a scoring rubric to ensure an objective and non-discriminatory method of review is used.

All recipients of the scholarship awards will be notified that the awards must be used for tuition, enrollment
fees, books, supplies and equipment necessary for the recipient's course of instruction at the institution where
the recipient will attend. The scholarship will be sent directly to the higher education institution with a directive
for how the funds may be used by the recipient.

You will follow up with the scholarship recipient and/or higher education institution to obtain a report to
determine that the funds were used in accordance with the specified parameters for the scholarship. In the event
the terms of the award are violated, your directors will investigate and review the circumstances on a case-by-
case basis and take appropriate action commensurate with the error. While most circumstances likely can be
easily resolved, egregious misapplications of scholarship awards may result in you revoking the award or
seeking repayment of misused funds.

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.

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

• 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