Advance approval of a foundation's scholarship procedures under § 4945(g)(1)

Plain-English summary

A private foundation asked the IRS to pre-approve how it will pick students for scholarships. Private foundations normally owe an excise tax when they give grants to individuals for study, unless the IRS approves their selection procedures in advance under section 4945(g). This foundation runs a first-year, non-renewable scholarship for high school juniors and seniors in a particular area who plan to attend an accredited college, university, or trade school. Applicants submit an essay, a selection committee made up of the sponsor's employees and disinterested volunteers scores them on the essay, and awards are paid directly to the school rather than the student. The IRS approved the procedures, so grants made under them are not taxable expenditures, and the scholarships are tax-free to recipients who use them for qualified tuition and related expenses under section 117. The approval is conditioned on the foundation keeping records, monitoring grantees, recovering any diverted funds, and not funding its own insiders or their relatives.

Ruling snapshot

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

Full text (IRS public release)

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

                                               Person to contact:
                                               Name:
                                               ID number:
                                               Telephone:

Release Number: 202621016
Release Date: 5/22/26

LEGEND
B = LOCATION                                   UIL: 4945.04-04
D = WEBSITE
G = GROUP
E = NUMBER
¢ 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. The purpose of the program is to provide
scholarships to students who attend an accredited four-year college or university, a two-year college or
university, or trade school described in IRC Sections 509(a)(1) & 170(b)(1)(A)(ii). Scholarships will be for the
first year of study only, will not be renewable, and will be paid directly to the educational institution, not the
student.

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

To be eligible for your scholarship, the student must:

* Attending high located in B who are in their junior or senior year.

* Plan to pursue a post-secondary education at an accredited four-year college or university, a two-year college
or university or a trade school within one year of graduation from high school

* Essay

You will rate the applicants based on the following criteria:
* Based on the quality of the composition of the essay

You will promote your scholarships by distributing the applications to high school students who may submit an
essay. You will publish a media release announcing the scholarship recipients on D and your social media
accounts. Your scholarships will be publicized to third-party 501(c)(3) organizations that you select. Your
scholarships will be available to all applications without regard to race, gender or other personal characteristics.

Your selection committee is composed of employees of G or one of its affiliates. Your selection committee will
be named by your board from among your directors and disinterested volunteers.

You intend to award approximately E scholarships of ¢ dollars annually. These amounts may be adjusted for
inflation. Your scholarships are given only for the first year of attendance and are not renewed.

Your recipient of a scholarship award will be required to submit evidence of matriculation to a qualifying
educational institution. You will pay the award directly to the accredited post-secondary educational institution
that maintains a regular faculty and curriculum and has a regularly enrolled body of students in attendance for
application to the tuition of the recipient. Your scholarship will not be renewable. In the event you receive any
information indicating that the grant has been diverted, you will undertake an investigation and take reasonable
and appropriate steps to recover the funds.

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.

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

* 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

Enclosures:
Letter 437, Letter 4792 - Redacted

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