PLR 200030025: Scholarship procedures receive advance approval

Plain-English summary

A foundation sought advance approval of a scholarship program administered by a publicly supported charity. The charity would receive applications, select recipients using academic and other stated criteria, pay awards, verify enrollment, and monitor use of the funds. The IRS approved the procedures under section 4945(g)(1), assuming the program operated as proposed with objective and nondiscriminatory awards. The ruling applied only to this scholarship program and assumed no awards to foundation managers, trustees, or selection committee members. Each recipient remained responsible for determining whether a scholarship was taxable under section 117.

Ruling snapshot

• Question: Would the proposed scholarship procedures satisfy section 4945(g)(1) so the grants would avoid taxable expenditure treatment?
• Outcome: Approved on the represented facts.
• Key authorities: IRC §§ 117, 170(c)(2)(B), and 4945(g)(1); Rev. Proc. 76-47.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Number: 200030025
Date: APR 25 2000
Contact Person:
ID Number:
Telephone Number:
SIN# 4945-00.00 4945-01.00
OP:E:EO:T3
Employer Identification Number:
A =
B =

Dear Sir or Madam:

This is reference to your letter dated October 27, 1999, requesting advance approval of
your grant making procedures under section 4945(g)(1) of the Internal Revenue Code.

The information submitted in this case shows that grants will be administered and
supervised by A, a publicly supported charity. The scholarship program will be called B. A will
prepare and furnish application forms, receive all applications, determine the recipients and
amount to be awarded, notify the recipients of the award, confirm enrollment in an educational
institution, make payment of the award, and supervise and investigate the use of the grant funds
by the recipients in their educational programs. Recipients are determined solely by A utilizing
selection criteria based on an analysis of detailed information whereby each candidate is
evaluated based on the following: scholastic aptitude as measured by performance on the
scholastic aptitude test; scholastic performance measured by rank in class; counselor appraisal,
and interests, activities and leadership contributions.

Scholarships will only be awarded to students that plan to enroll in an institution that meets
the requirements of section 170(b)(A)(ii) of the Code. The recipient will not be restricted in his or
her course of study. You have agreed to comply with the appropriate percentage tests set forth in
Revenue Procedure 76-47, 1976-2 C.B. 670.

Section 4945(d)(3) of the Code provides that the term “taxable expenditure” means any
amount paid or incurred by a private foundation as a grant to an individual for travel, study or
other similar proposes by such individual, unless such grant satisfies the requirements of section
4945(g).

Section 4945(g)(1) of the Code provides that section 4945(d)(3) shall not apply to an
individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure
approved in advance by the Secretary, if it is demonstrated to the satisfaction of the Secretary
that the grant constitutes a scholarship or fellowship grant which is subject to the provisions of
section 117(a) and is to be used for the study at an educational organization described in section
170(b)(1)(A)(vi) of the Code.

Revenue Procedure 76-47, 1976-2 C.B. 670, sets forth guidelines for a private foundation
conducting an employer-related grant program to obtain advance approval under section 4945(g)
of the Code.

Based on the information presented above, and assuming the scholarship program will
be conducted as proposed, with a view to providing objectivity and nondiscrimination in the
awarding of scholarship grants, we rule that your grants to A for the awarding of scholarships
comply with the requirements of section 4945(g)(1) of the Code. Thus, such expenditures made
in accordance with those procedures will not constitute “taxable expenditures” within the meaning
of section 4945(g)(3) of the Code.

The recipient of the scholarship is responsible for determining whether all or part of the
scholarship is includable in gross income under section 117 of the Code. We understand that A
will advise the recipient that amounts granted are taxable income, if the aggregate scholarship
amounts received by the recipient exceed tuition and fees (not including room and board)
required for enrollment or attendance at the educational institution and fees, books, supplies, and
equipment required for courses of instruction.

This ruling is based on the understanding that there will be no material change in the
facts upon which it is based, and that no grants will be awarded to foundation managers, trustees,
members of selection committees, or for a purpose inconsistent with the purposes described in
section 170(c)(2)(B) of the Code. Any change in the procedure must be reported to your Area
Manager for exempt organization matters.

Please note that this ruling is only applicable to grants awarded under the A scholarship
program as outlined above. Before you enter into any other scholarship program, you should
submit a request for advance approval of that program.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.

Sincerely,
Robert C. Harper, Jr.

Manager, Exempt Organizations
Technical Group 3