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Thursday February 2, 2023
Private Letter Ruling
Organization's Scholarships Are Not Taxable
Foundation requests advance approval of its scholarship program under Sec. 4945(g)(1). Foundation will provide scholarships to foster educational opportunities, advancement and enrichment. The scholarships will be awarded to high school seniors at Y High School. Eligible students must have a GPA of 3.0 or higher and plan to attend a two-year or four-year college or university full-time after high school graduation. The scholarship will be paid directly to the educational institution. The scholarship is a one-year award and only one scholarship is available from Foundation. Foundation will advertise the scholarships through Y High School's scholarship list. Foundation will not discriminate when selecting applicants. Scholarships will not be awarded to disqualified individuals, employees, relatives of any disqualified individuals or employees of Foundation. If the recipient fails to fulfill the requirement of enrolling full time, Foundation will attempt to recover the funds from the educational institution.
Expenditures from private foundations to individuals for travel, study or other similar purposes are generally taxable expenditures. However, Sec. 4945(g) provides an exception for grants that meet certain requirements. Under Sec. 4945(g), a grant will not be considered a taxable expenditure if the foundation awards the grant on an objective and nondiscriminatory basis, the IRS approves the grant procedure in advance, the grant is a scholarship or fellowship subject to Sec. 117(a) and the grant is to achieve a specific objective, produce a report or similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar skill or talent of the recipient as described in Sec. 4945(g)(3). Here, the Service determined that Foundation's procedures for awarding scholarships meet the requirements of Sec. 4945(g). As such, the scholarships will not be considered taxable expenditures.
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).
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 X to foster educational opportunities, advancement, and enrichment. The goal is to recognize an individual who embodies the spirit of Y, and academic experience. X will be in the amount of z dollars. You will maintain records of all recipients which will include names and addresses.
The applicant must be a senior at Y, with a GPA of at least 3.0, and plan to attend either a two or four-year college/university full-time. You will publicize X through the list the high school provides for available scholarships.
The application will consist of a 500-word essay discussing an accomplishment, event or realization that sparked a period of personal growth and a new understanding of themselves or others.
The scholarship is for one year only. The selection committee will consist of your board members, which will bring four or five applicants to the full board, to choose one recipient. The selection committee's family is not eligible for X.
You will give the scholarship directly to the school of the recipient's choice. You will supervise the scholarship with a follow-up that the student matriculate into the college or university on a full-time basis. You will follow up with the college or university to ensure the student is enrolled. Should the student not fulfill the requirements, you will attempt 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 grantee 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 X 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 May 25, 2021, which is the date your request was submitted.
• 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 X 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 X 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.
Director, Exempt Organizations
Rulings and Agreements