Advance approval of a private foundation's scholarship program for young women under 4945(g)(1)

Plain-English summary

A private foundation asked the IRS to pre-approve how it selects scholarship
winners. Foundations need this approval because IRC § 4945 taxes "taxable
expenditures," and a grant to an individual for study counts as one unless
the IRS approves the selection procedures in advance under § 4945(g). Here
the foundation runs a scholarship program for young women who live in certain
cities or a certain county and plan to attend a 2-year or 4-year college,
selecting winners through a committee using objective criteria (financial
need, essays, academics, activities, and an interview). The IRS approved the
procedures, so grants made under them are not taxable expenditures, and the
scholarships are tax-free to recipients if used for qualified tuition and
related expenses under § 117(b). The approval is conditional on the
foundation running the program as described, keeping records, supervising the
grants, and not awarding scholarships to insiders or their relatives.

Ruling snapshot

• Question: Do the foundation's scholarship selection procedures qualify for advance approval under IRC § 4945(g)(1), so its grants are not taxable expenditures?
• 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:

Taxpayer ID number:

IRS Person to contact:
Name:
ID number:
Telephone:

Release Number: 202618017
Release Date: 5/1/26

LEGEND UIL: 4945.04-04

B = Organization
C = Cities
D = County
E = State
G = Number
h dollars = 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 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 called B. Your program for young women who are residents of C or D, and who will attend a 2-year or 4-year college.

The purpose of your program is to aid students with their expenses for courses at an educational institution that qualifies as a tax-exempt organization under IRC Sections 509(a)(1) and 170(b)(1)(A)(ii).

To be eligible for scholarship, the applicant must:

• Be Female

• Be Resident of B or C for at least one year

• Be planning to attend full-time at an accredited college, university or trade school in state of D.

• If already in college, must maintain a 3.0 GPA with a minimum of 12 hours per semester.

• Interview with scholarship committee.

You will rate the applicants based on the following criteria:
* Financial need

• Personal Essay

• Academics

• School activities

• Extracurricular activities

Your scholarship program will be publicized by school counselors and teachers and through B website.

Your selection committee consists of the Board Directors. The scholarship committee's role is to review the applications received and determine each applicant's qualification for the scholarship. Relatives of members of the selection committee, or of your officers, directors, or substantial contributors, will not be eligible for awards.

You intend to award more than h dollars for G scholarships per school year. The number of scholarships will vary from year to year depending on your financial situation and the number of qualifying applicants. Each scholarship is an annual award, which may be renewed. To reapply, students must have maintained a 3.0 GPA with a least 12 semester hours or 2.0 GPA at a trade school. Payment is made directly to the educational institution for tuition, fees, and books.

Scholarship recipients will receive information each year on the procedure to verify continued eligibility for the scholarship. Each scholarship recipient must provide a report at the end of the scholarship year describing use of the funds and his or her academic progress. Where the reports or other information indicate all or part of a scholarship was not used for intended purposes, B will seek to recover the funds. You will retain complete records with respect to all scholarships awarded which shall include all information obtained by B to evaluate the qualifications of potential scholarship recipients, the identification of scholarship recipients, the completed application of each scholarship recipients, the amount of each scholarship, the date(s) of each scholarship payment, evaluation reports from scholarship recipients, and any additional information B may secure in the course of the scholarship administration process.

If you discover a misuse of funds a scholarship may be terminated at any time. Failure to meet the eligibility requirements will result in forfeiture of the scholarships.
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.

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

cc:

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