PLR 200127048: Scholarship grants approved with aggregate program test

Plain-English summary

A private foundation sought advance approval for scholarships administered by a publicly supported charity. The charity would select students using academic and extracurricular criteria, confirm enrollment, pay awards, and monitor how recipients used them. The foundation agreed to apply the percentage test in Revenue Procedure 76-47 across its scholarship programs available to the same students. The IRS approved the proposed grant procedures under IRC § 4945(g)(1), so grants made under them would not be taxable expenditures. The letter also states that recipients could exclude amounts actually used for qualified tuition and related expenses under § 117(a).

Ruling snapshot

• Question: Do the scholarship procedures satisfy IRC § 4945(g)(1) when the foundation applies the aggregate program percentage test?
• Outcome: Approved, subject to the stated program conditions.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1); Rev. Proc. 76-47.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE 200127048

WASHINGTON, D.C. 20224

Date: APR - 2 2001 Contact Person:
Identification Number:
Telephone Number:

SIN# 4945.00-00 4945.01-00 117.00-00

Employer Identification Number:

A =

B =

-

Dear Sir or Madam:

This is in reference to your letter dated July 27, 2000, requesting advance approval of your grant 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 is called B. A will prepare and furnish application forms, receive all applications, determine the recipients and amount to be awarded, notify the recipient’s 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 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)(1)(A)(ii) of the Code. The recipient will not be restricted in his or her course of study. You have agreed to ensure compliance with the appropriate percentage test set forth in Rev. Proc. 76-47 in the aggregate with respect to all the foundation scholarship programs that are available to the same individuals.

Section 4945(g) of the Code provides for the imposition of taxes on each taxable expenditure of a private foundation.

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 purposes 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.

Based on the information presented above, and assuming the programs 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 requirement 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 and as such are eligible for the exclusion from income provided for in section 117(a) of the Code to the extent that such grants are actually used for qualified tuition and related expenses within the meaning of section 117(b)(2) of the Code.

This ruling is based on the understanding that there will be no material change in the facts upon which is based, and that no grants will be awarded to foundation managers, trustees, members of selection committees, or for a purpose inconsistent with purpose described in section 170(c)(2)(B) of the Code. Any change in the procedure must be reported to the Ohio Tax Exempt and Government Entities (TE/GE) Customer Service office. The mailing address is: Internal Revenue Service, TE/GE Customer Service, P.O. Box 2508, Cincinnati, OH 45201.

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 the program.

We are informing the Ohio Tax Exempt and Government Entities (TE/GE) Customer Service office of this action. Please keep a copy of this ruling with your organization's permanent records.

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.

If you have any questions about this ruling, please contact the person whose name and telephone number are shown in the heading of this letter.

Sincerely,

Robert C. Harper, Jr.
Manager, Exempt Organizations
Technical Group 3