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Saturday June 19, 2021

Private Letter Ruling

Foundation's Scholarship Awards Approved

GiftLaw Note:
Foundation is a private foundation exempt from federal income tax. Foundation requested advance approval of its scholarship grant procedures under Sec. 4945(g). The program will offer scholarships to high school seniors from a specific high school who have demonstrated a commitment to the arts. Scholarship awards will be granted for the study of art at an institution of higher learning. The high school scholarship committee will evaluate applications. Each application will include an essay, samples of artwork and information on the students' grades. Scholarship recipients will be selected based on their applications, the recommendations of school counselors, personal interviews and financial need. The selection committee is made up of board members and any relatives of board members are ineligible. Once scholarship is granted, Foundation has agreed to ensure funds for tuition payments are paid directly to 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 be used for study at an educational organization described in Sec. 170(b)(1)(A)(ii). Here, the Service determined that the grant met the requirements of Sec.4945(g) and approved Foundation's request.
PLR 202034006 Foundation's Scholarship Awards Approved

8/21/2020 (5/28/2020)

Dear * * *:

You asked for advance approval of your scholarship grant procedures under Internal Revenue Code Section 4945(g). This approval is required because you are a private foundation that is exempt from federal income tax. You requested approval of your scholarship program to fund the education of certain qualifying students.

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 Code Section 4945(g)(1). As a result, expenditures you make under these procedures won't be taxable.

Also, 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 provide in Code Section 117(b)).

Description of your request

You will operate a scholarship program offering scholarships to local high school seniors from X High School, located in Y. You seek students who have demonstrated a commitment to the arts in their lives and in the classroom.

The scholarships will be in the amount of z dollars per student, for the study of art at a college or other institution of higher learning. All tuition payments are made directly to the educational institution. The scholarships are publicized at X High School and in the local media.

Applications are made to the high school scholarship committee. This consists of a 500-word essay describing the importance and impact of the arts on the world and in their own lives, samples of their artwork, and information on their grades. Also, the candidates are vetted by the school counselors.

Selection is based upon the student's essay, their grades, their recommendation from the high school counselors, their personal interview, and their financial need. The number and amount of grants is determined based upon your available funds, and on the candidate pool that year. The number and amount of grants is determined by the board and could change from year to year. The grants are one-time grants, but that doesn't prevent a scholarship recipient from reapplying for a subsequent year.

The selection committee is looking for students who have a talent and demonstrated a commitment to the arts, who have a high grade point average, and who have a financial need. Students' academic performance is tracked by the committee.

The selection committee is made up of board members. Relatives of board members are not eligible for scholarships.

You represent that you will complete the following: (1) arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded, (2) investigate diversion of funds from their intended purposes, (3) take all reasonable and appropriate steps to recover the diverted funds, ensure other grant funds held by the 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 diversions from occurring.

You represent that you will maintain all records related to the following: (1) individual grants including information to evaluate grantees, (2) grantees which are identified as a disqualified person, (3) how the amount and purpose of each grant was established, and (4) how you established supervision and investigation of the grants described above.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations (Code Section 4945). 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 of the following requirements of Code 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 Code Section 117(a).

The grant is to be used for study at an educational organization described in Code 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 Cincinnati Office of Exempt Organizations at:

Internal Revenue Service
Exempt Organizations Determinations
P.O. Box 2508
Cincinnati, OH 45201

You cannot 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 Code 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.

If you have questions, please contact the person listed at the top of this letter.


Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Published September 4, 2020
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