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Friday March 22, 2019

Private Letter Ruling

Scholarship Awards Not Taxable

GiftLaw Note:
A private foundation ("Foundation") requested advance approval of its scholarship award program. Foundation, a tax-exempt organization, plans to operate a merit-based scholarship program to promote female students interested in the fields of science, technology, engineering and mathematics ("STEM"). To be eligible for an award, the applicant must be a female student in her junior or senior year of high school in the states of C or D. To be considered, applicants must submit two essays, transcripts and ACT/SAT scores. The winner will receive tuition and related expenses once she enters graduate school. The recipient will receive funding for each of the three years that she remains in a graduate level program to obtain a degree in the STEM field. The scholarship recipient will be selected by a committee comprised of Foundation's staff and female scientists from renowned research institutes.

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. The award must be made on an objective, nondiscriminatory basis; it must receive advance approval from the IRS; it must be a scholarship or fellowship grant subject to Sec. 117(a); and it must be used for study at an educational organization described in Sec. 170(b)(1)(A)(ii). Here, the Service determined that Foundation's procedures for awarding scholarships meet the requirements of Sec. 4945(g). As such, the scholarship awards will not be considered taxable expenditures.
PLR 201814013 Scholarship Awards Not Taxable

04/06/2018 (01/08/2018)

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

Your letter indicates you will operate a scholarship program called B. The purpose of B is to promote young female scientists in the fields of science, technology, engineering and mathematics (STEM).

B is a merit-based award which will be granted to the top female STEM scholar who applies and aspires to continue her dreams in STEM after receiving an undergraduate degree. B is an investment in the future of young female scientists. The winner will receive e dollars of funding for each of three years that she remains in a graduate level program to obtain a degree in a STEM field.

To be eligible for the award the recipient must be a female student in her junior or senior year of high school located in the states of C or D. In the future, you hope to expand your program to include students from the entire United States.

Your selection of the winner will be based on the following:
  • An essay describing the applicant's most significant STEM research experience
  • An essay on the role of STEM in the future
  • School grades
  • ACT/SAT scores
  • Recommendations
  • Interview with the selection committee
The selection committee is comprised of your staff and female scientists from renowned research institutes. They will review the applications, interview the applicants and determine the winner.

The scholarship will be paid to the student once she is in graduate school for educational expenses including tuition, room, board, supplies or transportation, etc. The recipient will be required to show documentation of these educational expenses. In addition, they will be required to show proof they are still enrolled in their post-graduate program.

You represent that you will (1) arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded, (2) investigate diversions of funds from their intended purposes, and (3) take all reasonable and appropriate steps to recover diverted funds, 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 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 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.
Please keep a copy of this letter in your records.

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 April 20, 2018
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