IRS pre-approves a family-funded foundation's scholarship procedures

Plain-English summary

A private foundation asked the IRS to approve, in advance, the procedures for a scholarship program that helps recipients pursue higher education or technical training toward a career, funded by money the foundation raises from family members and friends. Under IRC Section 4945, a private foundation's grants to individuals for study are "taxable expenditures" that trigger excise tax unless the IRS pre-approves the grant-making procedures under Section 4945(g). To qualify, a student must be accepted and enrolled at a higher-education or learning institution, show community involvement, write a 300 to 500 word essay, and submit two recommendations; applicants are scored objectively against a rubric by a selection committee, with family of contributors and leaders excluded. Payments go directly to the school, must be re-confirmed with proof of enrollment each year, and are partly recoverable if the student leaves early; scholarships are not renewable but recipients can reapply. The IRS found the procedures objective and nondiscriminatory and approved them under Section 4945(g)(1), so the grants are not taxable expenditures and are tax-free to recipients used for qualified tuition under Section 117(b). This routine advance-approval letter (Letter 4792) binds only this foundation.

Ruling snapshot

• Question: Do the foundation's scholarship procedures qualify for advance approval under IRC Section 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC § 4945(d)(3), (g)(1); § 117(a), (b); § 170(b)(1)(A)(ii)

Full text (IRS public release)

Department of the Treasury                     Date:
Internal Revenue Service                        10/20/2025
IRS Tax Exempt and Government Entities          Taxpayer ID number:

                                                Person to contact:
                                                Name:
                                                ID number:
                                                Telephone:
Release Number: 202603008
Release Date: 1/16/2026
LEGEND                                          UIL: 4945.04-04

y dollars = Dollars

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 to allow recipients to receive education or technical
training towards a career. Your scholarships will be a minimum of y dollars each, and the number of grants will
be determined by the funds you are able to raise from family members and friends each year. You publicize your
program on your website. Applications are also submitted through this website.

To be eligible for a scholarship, the student must:
• Be accepted and enrolled into a higher education and learning institution.
• Be involved in community service, employment, volunteer work, leadership roles, or religious or
charitable organizations.
• Write a 300-500 word essay outlining their accomplishments, goals and career aspirations.
• Submit recommendations from two mentors, teachers or other authority that knows the student.

Applicants will be scored objectively against the eligibility criteria using a scoring rubric tool. Your
Scholarship Selection Committee is chosen by your board. Your Scholarship Selection Committee is
responsible for reviewing the applications and recommending scholarship recipients to your Board for final
selection. Family members of potential applicants may not serve on the Scholarship Selection Committee.
Also, family members of substantial contributors and anyone in any leadership role are disqualified from
benefiting from receiving a scholarship.

Your scholarship recipients must show proof of enrollment in a higher education institution. You will make all
payments directly to the applicable educational institution on behalf of the student. Confirmation of enrollment
must be demonstrated each year for the student to maintain the scholarship. Your student must remain in good
standing with the school to continue qualify for scholarship. If the recipient leaves school before the term is up,
they will be asked to pay a pro-rated portion of the grant back. Scholarships are not renewable, but recipients
can reapply for a scholarship each year through their senior year.

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.

• 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

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