IRS approves scholarship procedures for students from rural high schools

Plain-English summary

A foundation asked the IRS to approve its procedures for awarding scholarships to students at a college who graduated from rural high schools. Applicants would report their grades, activities, and progress toward a degree, and recipients would be selected using several criteria, including grades, school activities, extracurricular activities, friendship, sound learning, and rectitude. Two board members would separately score and review the applications, and scholarship checks would be paid directly to the college for the student's educational account. The awards would last one year, with students required to submit a new application for any later year. The foundation also agreed to obtain reports, investigate and recover diverted funds, withhold further payments when necessary, and maintain detailed grant records. The IRS approved the procedures under Section 4945(g)(1), so grants made as proposed will not be taxable expenditures. Awards used for qualified tuition and related expenses also may be excluded from recipients' income under Section 117(b).

Ruling snapshot

• Question: Do the foundation's scholarship procedures satisfy the advance-approval requirements of IRC Section 4945(g)(1)?
• Outcome: approved
• Key authorities: IRC § 4945(d)(3), (g)(1); IRC § 117(a), (b); IRC § 170(b)(1)(A)(ii), (c)(2)(B)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Date:
08/14/2025
Taxpayer ID number:

Person to contact:

Release Number: 202552035
Release Date: 12/26/2025

LEGEND
B = College
D = Number Range
E = Number
q dollars = dollar amount
r dollars = dollar 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 a scholarship program for students at B. Your scholarship amounts will
range from q dollars to r dollars per student.

You will solicit applications from students at B who have graduated from rural high schools. You estimate E
students will be eligible to apply. Applicants will complete your scholarship application form. On this form,
they will self-report information on their grades, activities, and progress towards a degree at B.

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

The scholarship criteria used to select recipients is based on several categories including grades, school and
extracurricular activities. The recipients must demonstrate traits of friendship, sound learning and rectitude in a
written description with their application. Based on the available funds, you will award D scholarships per year.
The awards are determined and allocated based on scoring completed by one of your board members. Another
board member will review the applications, scoring, and award allocation. Your President or the designee will
issue checks for the awards to B directly for distribution to the student's educational account. Funds will be
applied to their tuition and other school fees and costs. Your awards are for one year only and are not
renewable. An awardee must apply in a subsequent year and their application will be scored and an award based
on the current application only.

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.

• 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.

• The effective date of our approval is

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

• 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-Redacted

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