IRS Approves Foundation's Vocational And Academic Grant Procedures

Foundation Cleared for 'Socioeconomic Mobility' Grants

A private foundation focused on promoting socioeconomic mobility has received IRS approval for its scholarship procedures. The foundation's program supports both traditional college education and vocational training. The IRS ruled that the grants are not 'taxable expenditures' under Section 4945 of the Internal Revenue Code (IRC), which imposes excise taxes on private foundations for certain expenditures, and are excludable from recipients' income under Section 117(a), which defines the tax-exempt status of scholarships.

The Specifics: From Aircraft Mechanics to 3.0 GPAs

The foundation's request outlined a program focused on students from specific geographic areas—Cities L and M. The scholarships, awarded under Section 4945(g)(1) of the Internal Revenue Code (IRC), which pertains to qualified scholarships, would target graduates of 20 partner high schools in those cities. To be eligible, students needed to demonstrate a minimum 3.0 cumulative GPA, attend and live on campus at one of ten partner colleges or universities, pursue a major from a pre-approved list, and demonstrate financial need by qualifying for a federal Pell Grant. These scholarships are designed to cover educational costs, including tuition, books, and room and board.

In addition to traditional academic scholarships, the foundation sought approval for vocational training grants under both Section 4945(g)(1) and Section 4945(g)(3) of the IRC. Section 4945 concerns 'taxable expenditures' by private foundations. Specifically, 4945(g)(1) covers grants that qualify as scholarships under Section 117(a), which defines the tax-exempt status of scholarships, while 4945(g)(3) applies to grants for achieving specific objectives or enhancing skills. These vocational grants were intended for students pursuing certification and training in fields with demonstrable demand for skilled labor. Examples cited included radiation technology, dental hygiene, and aircraft mechanics.

The foundation stated it would fund these grants directly to the educational institutions and would arrange for annual reports on the students’ progress, approved by a faculty member or official. Furthermore, the foundation committed to monitoring the use of funds and would cease funding and seek reimbursement for any misuse.

IRS Rationale: The Objective Standard

The IRS approved the foundation's procedures after determining they met the requirements for awarding both scholarships and vocational grants. The key to the IRS's decision rested on whether the foundation's grant-making process was "objective and nondiscriminatory," a requirement to avoid private foundations incurring excise taxes on what the tax code calls "taxable expenditures." Section 4945 imposes excise taxes on taxable expenditures of private foundations, including grants to individuals for travel or study, unless certain conditions are met.

For scholarships, the IRS specifically cited Section 4945(g)(1), which applies to grants that are scholarships or fellowship grants subject to Section 117(a). To qualify, the grants must be used for study at an educational organization described in Section 170(b)(1)(A)(ii)—generally, institutions with a regular faculty, curriculum, and student body. For the vocational training grants, the IRS referred to Section 4945(g)(3), which covers grants aimed at achieving a specific objective or improving a skill.

To receive advance approval of its educational grant procedures, the foundation needed to demonstrate compliance with Treasury Regulation Section 53.4945-4(c)(1). This regulation mandates that the grant procedure include an objective and nondiscriminatory selection process, results in recipients performing the activities the grants are intended to finance, and includes plans to obtain reports to determine whether the recipients have performed the activities. The foundation represented that selection of grantees would be based on listed criteria, weighed on an objective and nondiscriminatory basis.

Implications for Foundations

This ruling offers a blueprint for private foundations aiming to fund vocational training programs through individual grants. Specifically, it highlights the IRS's acceptance of grant-making procedures that support both traditional academic scholarships under Section 4945(g)(1), which applies to grants that constitute a scholarship or fellowship grant subject to Section 117(a), and vocational training under Section 4945(g)(3), which covers grants where the purpose is to achieve a specific objective, produce a report or similar product, or improve/enhance a skill. Foundations should note the necessity of upfront IRS approval for their grant-making processes to avoid excise taxes under Section 4945, which imposes taxes on taxable expenditures of private foundations. As with all Private Letter Rulings, this determination applies only to the requesting taxpayer. The IRS also noted the foundation must report any significant changes to its program to the IRS and that the ruling cannot be cited as precedent.