IRS Approval of Scholarship Program for Religious Professionals Under IRC Section 4945(g)

IRS Greenlights Scholarship Program for Aspiring Religious Professionals

The IRS has issued a private letter ruling (PLR) approving a private foundation’s scholarship program for students pursuing religious vocations, confirming the program does not constitute a taxable expenditure under IRC §4945(a). In PLR 2026-XX (issued September 15, 2026), the IRS ruled that the Foundation’s scholarship grants—targeting low-to-moderate-income students enrolled full-time at approved institutions with a demonstrated commitment to religious service—qualify for the exception under IRC §4945(g). The ruling hinged on the program’s objective selection criteria, independent review process, and exclusion of disqualified persons, as outlined in the Foundation’s application. While the PLR provides tailored guidance for this Foundation, it remains non-precedential, offering no binding authority for other programs. Private foundations structuring scholarship initiatives for religious or vocational training should treat this ruling as a compliance roadmap, particularly in ensuring selection committees operate independently and criteria avoid favoritism toward disqualified persons under IRC §4946.

The Foundation's Request: A Scholarship Program with a Mission

The Foundation sought IRS guidance on a scholarship initiative designed to support college students from low-to-moderate-income households who are pursuing religious vocations. The program targets applicants demonstrating a genuine commitment to developing their identity as religious professionals, with awards structured to reflect both financial need and merit.

The Foundation anticipates awarding approximately D scholarships annually, with a total annual disbursement of roughly e dollars. The number of awards may fluctuate based on available funding and the quality of the applicant pool. Individual scholarship amounts follow a tiered structure, with awards ranging from f dollars per year, determined by demonstrated financial need, the strength of a required essay, and the availability of funds.

To qualify for consideration, applicants must meet residency requirements in G, as specified in the Foundation’s application materials. The program’s mission-driven focus distinguishes it from general scholarship initiatives by prioritizing candidates whose vocational goals align with religious service.

Eligibility and Selection: Stringent Criteria for a Sacred Calling

To qualify for the Foundation’s scholarship, applicants must meet residency requirements in G, with a primary residence in H. The program’s mission-driven focus distinguishes it from general scholarship initiatives by prioritizing candidates whose vocational goals align with religious service.

Applicants must be enrolled full-time at an approved institution, completing a minimum of 12 credit hours per semester. Financial need is a core consideration, with eligibility tied to a FAFSA Expected Family Contribution (EFC) of j dollars or below and documented unmet need of at least k dollars per year after all institutional and federal aid. Academic performance is also evaluated, with a required cumulative GPA of 3.0 or above; entering freshmen must submit first-semester grades before disbursement.

A 500-word essay is mandatory, requiring substantive personal engagement with the integration of faith and vocational purpose. The application process further emphasizes community involvement, with active participation in a campus religious ministry or local church community demonstrated through a letter of support from a pastor, campus minister, or ministry leader. Applicants must also certify they are not disqualified persons under Code §4946 or family members within the meaning of Code §4946(d) of any disqualified person.

Priority is given to first-generation college students, those from underrepresented communities, and students intending to serve C communities professionally. The application package requires a completed cover sheet, the essay, academic transcripts (official for new applicants, unofficial for renewals), an academic letter of recommendation from a faculty member or advisor, a spiritual letter of recommendation from a pastor or spiritual director, and a financial aid award letter showing all current aid for accurate unmet need calculation.

Selection is based on a tiered system prioritizing financial need as the primary criterion, followed by essay quality demonstrating genuine personal reflection on faith and vocation. Academic achievement—including GPA and faculty recommendation quality—ranks next, followed by community rootedness tied to service in C communities. Spiritual formation, evidenced by church involvement and the strength of the spiritual leader’s recommendation, is also considered, as is attendance at a designated institution. The scholarship committee, appointed by the board of directors, consists of no fewer than three members to ensure impartial evaluation.

The Application Process: A Holistic Review

To apply for the scholarship, eligible students submitted a multi-faceted package designed to assess both academic merit and vocational commitment. Each applicant provided a completed Application Cover Sheet, a required Essay demonstrating personal reflection on faith and vocation, and official or unofficial academic transcripts—official transcripts were mandated for new applicants, while renewals accepted unofficial versions. The package further included an academic letter of recommendation from a current faculty member or academic advisor, a spiritual letter of recommendation from a pastor, campus minister, or spiritual director, and a financial aid award letter from the applicant’s institution showing all current aid to accurately calculate unmet need.

The scholarship committee, appointed by the board of directors and consisting of no fewer than three members, conducted a holistic review of each application. Selection criteria prioritized financial need, the quality of the essay reflecting genuine personal reflection on faith and vocation, academic achievement—including GPA and the quality of the faculty recommendation—and community rootedness, particularly ties to and intent to serve a C community. Spiritual formation, evidenced by church involvement and the strength of the spiritual leader’s recommendation, and attendance at a designated institution also factored into the evaluation.

Conflict-of-interest rules governed committee deliberations. While committee members could all be directors, no member voted on any application where they had a familial or other close personal relationship with the applicant or where they would otherwise derive a private benefit from the selection of that applicant. This safeguard ensured impartiality in the selection process.

Renewal and Support: Nurturing Vocational Formation

The Foundation’s scholarship program extends beyond initial awards by requiring recipients to meet rigorous renewal standards designed to ensure sustained commitment to their vocational path. To maintain eligibility, scholarship recipients must maintain a cumulative GPA of 3.0 or above, with those falling below this threshold in any single semester placed on academic monitoring. Continued full-time enrollment at a designated educational institution remains mandatory, as does the submission of an updated FAFSA each year to verify ongoing financial need. Each year, recipients must also submit an annual report detailing their vocational formation, academic progress, and integration of faith into their studies. Engagement with the Foundation’s programming or established mentoring connections is likewise required to reinforce the recipient’s vocational discernment.

Beyond financial support, the Foundation provides recipients with structured opportunities for growth and resilience. An annual gathering brings current scholars together for mentoring, peer discussion, and vocational encouragement, fostering a community of shared purpose. Informal mentoring connections with religious professionals in the recipient’s intended field are facilitated throughout the scholarship year, offering guidance from experienced practitioners. Annual self-reflection reports on faith and vocational development are required, ensuring recipients remain intentional in their formation journey. For those facing acute financial disruption, the Foundation offers emergency support through a one-time grant, providing a safety net during unforeseen challenges.

IRS Compliance: Ensuring Charitable Use of Funds

The Foundation’s scholarship program meets the IRS’s strict compliance standards under IRC §4945(g), which exempts qualifying scholarship grants from the 20% excise tax on taxable expenditures. To secure this exemption, the Foundation committed to a multi-layered compliance framework designed to prevent fund diversion and ensure grants serve their charitable purpose.

Scholarship disbursements are structured to minimize risk. Awards are paid directly to educational institutions on behalf of recipients whenever possible, eliminating the need for recipients to handle funds. When direct payments are not feasible, the Foundation requires verified annual reports from each recipient’s institution, including courses taken and grades received, to confirm funds are used for educational purposes. Upon completion of a grantee’s program, the Foundation obtains a final report from the educational institution to confirm the grant’s purpose was fulfilled.

The Foundation also established rigorous procedures to address potential fund diversion. It pledges to investigate any suspected diversion of grant funds from their intended purposes, including conducting interviews with grantees and reviewing financial records. If diversion is confirmed, the Foundation will take all reasonable and appropriate steps to recover diverted funds and ensure remaining grant funds held by the grantee are redirected to their intended use. Critically, the Foundation reserves the right to withhold all future payments to a grantee until it receives written assurances that diversions will cease and the grantee will implement extraordinary precautions to prevent recurrence.

Record-keeping obligations are equally stringent. The Foundation will maintain complete documentation for each grant, including the grantee’s eligibility information, the amount and purpose of the award, and evidence of its supervision and investigation of the grant. It will also identify whether a grantee is a disqualified person under IRC §4946 to prevent self-dealing. These records must be retained to demonstrate compliance with IRC §4945(g) in the event of an IRS audit.

These safeguards directly address the IRS’s concerns under IRC §4945(g), which requires private foundations to implement mechanisms ensuring grants are used exclusively for charitable purposes. By centralizing disbursements, mandating institutional verification, and imposing conditional payment holds, the Foundation’s program aligns with the regulatory framework designed to prevent taxable expenditures. The IRS’s approval of this structure underscores the importance of proactive compliance measures in maintaining a foundation’s tax-exempt status while advancing its charitable mission.

The Legal Backdrop: IRC Section 4945(g) and Taxable Expenditures

The IRS’s approval of the Foundation’s scholarship program hinged on compliance with IRC Section 4945(g), which carves out an exception to the excise taxes imposed by IRC Section 4945(a) on private foundations for "taxable expenditures." Under Section 4945(a), a private foundation that makes a grant to an individual for travel, study, or similar purposes is subject to a 20% excise tax on the amount of the grant, unless the grant qualifies for the Section 4945(g) exception. The IRS explicitly confirmed that the Foundation’s program met all four statutory requirements for this exception, as outlined in the ruling:

"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)."

The Foundation satisfied these conditions through a formalized, merit-based selection process that prioritized academic achievement and vocational commitment to religious service, ensuring grants were awarded without favoritism or discrimination. The IRS’s advance approval of the program’s procedures, documented in the ruling, eliminated any ambiguity about compliance with the procedural requirement of Section 4945(g).

The Foundation’s grants also aligned with IRC Section 117(a), which excludes from a recipient’s gross income amounts received as a "qualified scholarship" used for tuition, fees, books, and required supplies. The IRS confirmed that the grants were structured as scholarships under this section, ensuring recipients would not incur tax liability for the amounts received. Additionally, the grants were designated for study at an educational organization described in IRC Section 170(b)(1)(A)(ii), which requires the organization to maintain a regular faculty, curriculum, and enrolled student body. The Foundation’s partnerships with accredited theological institutions met this definition, as the IRS implicitly recognized by approving the program.

The ruling also underscored the prohibition on grants to disqualified persons under IRC Section 4946, which includes foundation managers, substantial contributors, and their relatives. The IRS’s conditions explicitly barred awards to the Foundation’s creators, officers, directors, trustees, or their relatives, reinforcing the requirement that scholarships serve charitable—not private—purposes. By centralizing disbursements through educational institutions and verifying recipient eligibility, the Foundation’s program avoided the self-dealing risks that Section 4946 targets.

The IRS’s determination letter, issued under IRC Section 6110, further clarified that the approval applied only to the described program and would not serve as precedent for other foundations. The ruling emphasized the Foundation’s obligation to report any material changes to its program and maintain records sufficient to substantiate compliance with the statutory requirements. This strict adherence to procedural safeguards ensured the Foundation’s scholarship program operated within the narrow confines of the tax-exempt framework, minimizing exposure to excise taxes while advancing its charitable mission.

Implications for Private Foundations: A Roadmap for Scholarship Programs

Private foundations seeking to launch scholarship programs must treat this PLR as a cautionary blueprint rather than a green light. The IRS’s approval hinged on exacting procedural safeguards that other foundations cannot replicate without identical facts. The ruling’s most critical lesson is that objective, nondiscriminatory selection criteria are non-negotiable—foundations cannot rely on subjective measures like "leadership potential" or "moral character" without measurable benchmarks. The IRS explicitly warned that any material deviation from the described program risks loss of approval, noting that the determination "only covers the grant program described above" and applies "only to you." This narrow scope underscores the IRS’s refusal to extend precedent beyond the taxpayer’s specific facts.

The ruling also reinforces the absolute prohibition on awards to disqualified persons, including foundation managers, their relatives, and substantial contributors. The IRS reiterated that such grants would violate IRC §4941’s self-dealing rules, triggering a 10% excise tax on the amount involved and a 200% penalty if uncorrected. Private foundations must therefore implement robust screening protocols—such as cross-referencing applicant lists against disqualified person rosters—to avoid inadvertent violations. The IRS’s emphasis on recordkeeping further demands that foundations maintain "adequate records and case histories" to substantiate compliance, a requirement that extends to IRC §6110’s public disclosure obligations (mandating redaction of personally identifiable information).

For foundations considering similar programs, the PLR serves as a compliance roadmap with strict guardrails. The IRS’s insistence on IRS pre-approval—whether via a private letter ruling or Form 8940—highlights the risk of proceeding without advance guidance. The ruling also clarifies that significant program changes must be reported to the IRS at the Covington, KY address, including shifts in selection criteria or eligibility pools. Foundations that fail to report such changes risk losing their determination’s protections, leaving them exposed to IRC §4945’s 20% excise tax on taxable expenditures. While the PLR provides valuable guidance, its non-precedential nature means other foundations cannot cite it to justify deviations from the IRS’s strict framework. The safest path forward remains consulting tax counsel to tailor a program to the foundation’s unique facts while adhering to the PLR’s core principles: independent selection, objective criteria, and ironclad compliance mechanisms.