Private Letter Rulings - IRS Approves Scholarship Procedures
GiftLaw Note:
Foundation plans to operate a scholarship program to encourage attendance and participation at conferences by individuals who do not have the financial means to attend. Foundation will pay for and provide reimbursement for travel and lodging expenses related to attendance for Foundation's events. A set number of scholarship grants will be awarded to grantees annually. Grantees may volunteer to serve on working groups or participate in projects during the conference but are not required to do so as a condition of the grant. To ensure the grantees attend the conference, they are required to check-in with Foundation's staff each day of the event and complete a survey. Foundation will investigate any instance where grantee fails to submit required reports or forms if there is indication the funds are not being used for its intended purposes. The selection committee will select recipients on an objective and nondiscriminatory basis. Foundation requested advance approval of its scholarship procedures under Sec. 4945(g)(3).
Under Sec. 4945, there is an excise tax on taxable expenditures of private foundations. A taxable expenditure is any amount paid to an individual for travel, study or other similar purposes. Under Sec. 4945(g), an expenditure is not taxable if it is awarded on an objective and nondiscriminatory basis, the IRS approves the grant procedures 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). To receive approval, the foundation must show the grant procedure is objective and nondiscriminatory, that the grant procedure results in recipients performing the activities intended by the grant and the foundation obtains reports to determine whether the intended activities were performed by the recipients. Reg. 53.4945-4(c)(1). Here, the Service determined that Foundation's scholarship procedures met the requirements of Sec. 4945(g). Thus, the scholarship program will not be considered a taxable expenditure.
Under Sec. 4945, there is an excise tax on taxable expenditures of private foundations. A taxable expenditure is any amount paid to an individual for travel, study or other similar purposes. Under Sec. 4945(g), an expenditure is not taxable if it is awarded on an objective and nondiscriminatory basis, the IRS approves the grant procedures 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). To receive approval, the foundation must show the grant procedure is objective and nondiscriminatory, that the grant procedure results in recipients performing the activities intended by the grant and the foundation obtains reports to determine whether the intended activities were performed by the recipients. Reg. 53.4945-4(c)(1). Here, the Service determined that Foundation's scholarship procedures met the requirements of Sec. 4945(g). Thus, the scholarship program will not be considered a taxable expenditure.
7/21/2023 (04/24/2023)
Dear * * *:
You asked for advance approval of your educational grant procedures under Internal Revenue Code (IRC) Section 4945(g)(3).
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 educational grants. Based on the information you submitted, and assuming you will conduct your program as proposed, we determined that your procedures for awarding educational grants meet the requirements of IRC Section 4945(g)(3). As a result, expenditures you make under these procedures won't be taxable.
Description of your request
Your letter indicates you will operate W to encourage attendance and participation at X conferences by individuals who do not have the ability to pay travel expenses, in particularly for those with valuable contributions to the conference topic who do not have the financial means to attend. You will pay for or provide reimbursement for travel and lodging expenses related to attendance to your events.
You will publicize the availability of the application via the Internet and applicants will complete an on-line application. Eligible applicants are those professionals and students who are engaged in financial education but do not have the ability to pay to travel to your events.
You award grants based on an objective and nondiscriminatory basis. Your selection committee consists of your employees. They will select grantees based on their responses to questions included in the application. The questions address the applicant's interest in your programming, their ability to provide input to the financial education field, their ability to offer valuable contributions to the event outcomes and goals, their ability to take actions based on the event, and their expressed financial need.
You anticipate awarding Z, y dollars grants annually. The grants will enable the grantees to attend and participate in your conference events. To ensure grantees attend the conference, they are required to check-in with your staff each day of the event and to complete an event survey. Grantees may volunteer to serve on working groups or participate in projects during the conference but that are not required to do so as a condition of the grant.
Grant payments for lodging are paid directly to the hotel on behalf of the grantee. Transportation expenses are reimbursed upon proper documentation. A grantee will forfeit his/her grant if he/she fails to attend the conference. If the grantee fails to timely check-in as required during the event, the hotel expenses will be charged to his/her credit card on file. Reimbursement for travel will not be made without the proper receipts and documents.
You will investigate any instance where a grantee fails to submit a required report or form or if there is indication that grant funds are not being used for the intended purposes. You will take all reasonable and necessary steps to recover the funds and will withhold further payments to the grantee.
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.
- 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 grants 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 IRC Section 117(a) and is to be used for study at an educational organization described in IRC Section 170(b)(1)(A)(ii); or
- A prize or award subject to the provisions of IRC Section 74(b), if the recipient of the prize or award is selected from the general public; or.
- 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.
- The grant procedure includes an objective and nondiscriminatory selection process.
- The grant procedure results in the recipients performing the activities the grants were intended to finance.
- The foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance.·
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.
- The effective date of our approval is March 23, 2022, 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 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.
- 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