IRS approves three need-based scholarship programs

Plain-English summary

A private foundation proposed three need-based scholarships. One would support a graduating scholar-athlete who planned to join a college athletic team, another would support a graduating student planning to study medicine, and the third would support a student attending a specified private high school. Schools would screen applicants and recommend up to three candidates, while a selection committee would make the final choices based on academics, aptitude, goals, experience, financial need, motivation, character, ability, and potential. Committee members had to disclose conflicts, specified insiders and their relatives were ineligible, and payments would go directly to the educational institutions. The foundation also agreed to review annual reports and investigate any misuse of funds. The IRS approved the procedures under § 4945(g)(1), so grants made as proposed would not be taxable expenditures, and qualified educational use may be excluded from recipients' income under § 117(b).

Ruling snapshot

• Question: Do the procedures for the foundation's three need-based scholarship programs satisfy IRC § 4945(g)(1)?
• Outcome: Approved, subject to operating the programs as described.
• Key authorities: IRC §§ 117(b), 170(b)(1)(A)(ii), 4945(d)(3), 4945(g)(1).

Full text (IRS public release)

Date:

~
Department of the Treasury
fll'J Internal Revenue Service
01/30/2025
Taxpayer ID number:
Tax Exempt and Government Entities
IRS P.O. Box 2508
Cincinnati, OH 45201
Person to contact:
Name:
ID number:
Telephone:
Release Number: 202517025
Release Date: 4/25/2025

LEGEND
UIL: 4945.04-04
B = School
C = State
D = School
E = State
F = Academy
G=number
y =$amount
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 detern1ined 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 arc 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 scholarship program under IRC Section 4945(g)( 1), which will offer three separate need-based scholarships as follows:

• An annual scholarship for a graduating scholar-athlete from B in C who plans to study and be a member of a Division I, II, or III level athletic team at a college or university of their choice

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T
• An annual scholarship for a graduating scholar from D in E who plans to become a physician and study medicine at the college or university of their choice

• An annual scholarship for a scholar who plans to attend F in C for their sophomore, junior, and senior years of high school

The number of scholarship awards will range from G annually for the fall and spring semesters. Each scholarship will be awarded in an amount of up to y per year and will be publicized through contact with school administrators.

The eligibility for each of the scholarships are as follows:

• For the B scholarship, the recipient must be a graduating senior scholar-athlete from their school in good academic standing who will attend and be a student-athlete at a college or university

• For the D scholarship, the recipient must a graduating senior from their school in good academic standing who plans to become a physician and study medicine at a college or university

• For F scholarship, the recipient must be a freshman in good academic standing at their current school and plans to attend F through their senior year

Applicants for any of the scholarships must submit a copy of their official transcript, an application, a personal essay, and documentation of financial need. The schools which the applicants currently attend when applying for the scholarships will be responsible for reviewing the applications for each scholarship and, presenting up to three candidates for evaluation by the selection committee. The selection committee will then choose the recipients from among the recommended candidates. The selection committee will evaluate the recommended candidates based on the following criteria:

• Prior academic pcrfonnance
• Performance on tests designed to measure ability and aptitude for educational work
• Information regarding the applicant's career aspirations, academic and other relevant experiences, and financial need
• The selection committee's conclusions as to the applicant's motivation, character, ability, and potential

The Band D scholarships may be renewed for up to four years, provided that the recipient remains in good academic standing at their college or university. F scholarship may be renewed for the recipient's sophomore through senior years, provided that the recipient remains in good academic standing at the school.

Your selection committee will be chosen by your Board of Directors. Members of your selection committee must disclose personal knowledge of and relationships with any applicant who was recommended by their school for consideration for any of your scholarships. Members must refrain from participation in the selection process in circumstances where they would derive, directly or indirectly, any private benefit from the selection of an applicant over others. Relatives of your selection committee members, your officers, directors, or substantial contributors arc not eligible for your scholarships. You will pay scholarship funds directly to the college or university to which the recipient will attend. You will arrange to receive and review recipient transcripts and reports annually. If you suspect misuse of any scholarship funds, you will investigate diversion of said funds from their intended purposes and withhold further payments until you obtain assurances that future diversions will not occur.
Letter 4792 (Rev. 1-2022)
Catalog Number 58263T
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 ofIRC Section 117(a).
• The grant is to be used for study at an educational organization described in IRC Section l 70(b)(l )(A)(ii). Other conditions that apply to this determination
• This detennination 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 3 lA 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 infonnation, as required by IRC Section 6110. We've enclosed Letter 437, Notice oflntention 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