Foundation's scholarship and educational-grant procedures approved in advance

Plain-English summary

A private foundation that makes grants to individuals for study or travel normally owes an excise tax on those payments unless the IRS approves its grant-selection procedures in advance. Here a foundation runs a program to support working- and middle-class high school juniors so they can attend college, awarding both scholarships (for tuition and related costs) and educational grants (for application costs and a need-based summer career stipend). The IRS approved both sets of procedures: the scholarships under section 4945(g)(1) and the educational grants under section 4945(g)(3). The foundation selects recipients on an objective, nondiscriminatory basis through a committee (excluding relatives of insiders), pays schools directly, supervises recipients, and will investigate and recover any misused funds. Because the procedures qualify, the grants are not "taxable expenditures," and scholarship recipients are generally not taxed on amounts used for qualified tuition and related expenses under section 117.

Ruling snapshot

• Question: Do the foundation's scholarship and educational-grant selection procedures qualify for advance approval so the grants are not taxable expenditures?
• Outcome: approved
• Key authorities: IRC § 4945(g)(1) and (g)(3); IRC §§ 117, 170(b)(1)(A)(ii); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 10/03/2024
IRS Tax Exempt and Government Entities Taxpayer ID number:

Person to contact:

Release Number: 202452018
Release Date: 12/27/24

LEGEND UIL: 4945.04-04
B = Name

C = Numbers

D = Name

E = Number

F = Name

x dollars = Amounts
Dear

You asked for advance approval of your scholarship procedures under Internal Revenue Code (IRC) Section
4945(g)(1) and advance approval of your educational grant procedures under IRC Section 4945(g)(3).

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.

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)).

We also approved your procedures for awarding educational grants. Based on the information you submitted,
and assuming you will conduct your program as proposed, we determined that your procedures for awarding
educational grants meet the requirements of IRC Section 4945(g)(3). As a result, expenditures you make
under these procedures won't be taxable.

Description of your request

Your letter indicates you will operate a scholarship program called B. The purpose of B is to provide
comprehensive financial support to students from the working and middle classes in order for them to attend a
higher educational institution described in IRC Section 170(b)(1)(A)(ii). Under B, you will award grants under

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


both Sections 4945(g)(1) and 4945(g)(3). The grants that cover tuition and related expenses in order for the
recipient to attend a qualified educational institution will generally be considered grants under IRC Section
4945(g)(1). Grants that fund the college application process and other ancillary expenses as well as a summer
career stipend which will be based on need will generally be considered grants under Section 4945(g)(3).

Under B, you anticipate that recipients will be selected in their junior year of high school so that assistance can
be provided prior to college. Selecting students in their junior year of high school allows the recipients to apply
to their top choice schools without having to consider costs.

To promote B, you will utilize your web site and social media. You will also partner with third-party
opportunity programs, charter, public and private high schools, and community-based organizations to leverage
their established processes and structural capacity to identify high-potential students from the working and
middle classes. From the candidates identified by such organizations, you expect to select student recipients for
each cohort year. Initially, C students are expected to be selected from D while E students are expected to be
selected from local community-based organization(s). You also intend to expand B to identify students through
additional partners.

To be eligible for B, students must be in their junior year of high school, come from a working- or middle-class
background and demonstrate financial need. For purposes of determining whether a potential recipient is
income qualified, you will review location-specific data gathered by F. Recipients may also be lower-income
individuals as defined by F. Furthermore, potential recipients must demonstrate merit which is determined
based on a specific grade point average based on whether they attend a public or private school, essays,
extracurricular activities, volunteer work, community involvement and letters of recommendation.

Recipients will be selected by a selection committee consisting of your officers tasked with managing the
process of approving and awarding grants. Relatives of members of the selection committee, or of your officers,
directors, or substantial contributors will not be eligible for awards.

The selection committee will rate the applicants based on their financial need, academics, essays, letters of
recommendation, volunteer work, community service and their extracurricular activities,

Generally, the grants will be awarded in amounts in the range of x dollars depending on the educational
institution that each recipient attends and are renewable contingent upon continued attendance by the recipient
at the applicable educational institution with acceptable academic performance.

You will generally pay grants directly to the educational institution by check once the recipient is attending the
educational institution. A small portion of the funds will go directly to the recipient through a debit card system
that allows you to track spending and view receipts.

You will exercise regular and meaningful supervision of the grant recipients by, for example, requiring regular
documentation and reports from the recipients during the term of the grant, and maintaining regular
communication throughout the year. You will take steps to verify all applicant's documentation before
approving any grants under B and once approved, will verify receipt of funds. In cases in which you determine
that any part of the grant has been used for improper purposes, you will take all reasonable and appropriate
steps to recover diverted funds. You may further use a close-out survey to ensure student accountability.

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

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.

IRC Section 4945(g)(1) Requirements:

* 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).
IRC Section 4945(g)(3) Requirements:

* 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 IRC Section 117(a) and is to be used for study at an educational
organization described in IRC Section 170(b)(1)(A)(ii).

- A prize or award subject to the provisions of IRC Section 74(b), if the recipient of the prize or award is
selected from the general public.

- To achieve a specific objective; produce a report or similar product; or improve or enhance a literary,
artistic, musical, scientific, teaching, or other similar skill or talent of the recipient.

To receive approval of its educational grant procedures, Treasury Regulation Section 53.4945-4(c)(1) requires
that a private foundation show:

* The grant procedure includes an objective and nondiscriminatory selection process.

* The grant procedure results in the recipients performing the activities the grants were intended to finance.

* The foundation plans to obtain reports to determine whether the recipients have performed the activities that
the grants were intended to finance.

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


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.

We've sent a copy of this letter to your representative as indicated in your power of attorney.
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