PLR 200227039: Foundation scholarship procedures receive advance approval

Plain-English summary

An organization proposed to fund scholarships for graduating seniors from specified school districts through a public charity that would administer and supervise the awards. The charity would select students using academic performance, recommendations, activities, leadership, and financial need. The IRS approved the grant procedures under section 4945(g)(1), so payments following them would not be taxable expenditures by a private foundation. Scholarship recipients could exclude amounts actually used for qualified tuition and related expenses under section 117. Approval depends on the program operating as described, with no awards to the organization's insiders or selection committee members and no material change in the procedures.

Ruling snapshot

• Question: Do the proposed scholarship grant procedures satisfy the advance approval requirement of section 4945(g)(1)?
• Outcome: Approved, subject to the stated program and recipient restrictions
• Key authorities: IRC §§ 117(a), 117(b)(2), 170(b)(1)(A)(ii), 4945(d)(3), 4945(g)(1)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224 200227039

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: APR 08 2002 Contact Person:
Identification Number:

Telephone Number:
(202) 283-8954

[illegible handwritten notation]

Legend:
B=
C=
D=

Dear Sir or Madam:

This is in reference to your letter of March 5, 2002, requesting advance approval of your grant procedures under section 4945(g) of the Internal Revenue Code.

The information submitted indicates that grants will be administered and supervised by B. B is exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code and has been classified as other than a private foundation under sections 509(a)(1) and 170(b)(1)(A)(vi).

Your scholarship program is called C. Under the terms of an agreement, you will make annual contributions to B to fund scholarships for the benefit of graduating high school seniors from specific D school districts who plan to enroll in a full-time undergraduate course of study at an accredited four-year college or university. B 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 B utilizing selection criteria 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. In addition, financial need is taken into consideration.

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/her course of study.

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Section 4945 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 study at an educational institution described in section 170(b)(1)(A)(ii).

Because your scholarships are not employer-related grants, the provisions of Rev. Proc. 76-47 are not applicable.

Based upon the information submitted, and assuming your 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 B for the awarding of scholarship grants comply with the requirements of section 4945(g)(1) of the Code. Expenditures made in accordance with these procedures will not constitute “taxable expenditures” within the meaning of section 4945(d)(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 conditioned on the understanding that there will be no material changes in the facts upon which it is based. It is further conditioned on the understanding that no grants will be awarded to your organization’s creators, officers, directors, trustees, or members of the selection committee, or for a purpose inconsistent with the purposes described in section 170(c)(2)(B) of the Code.

The approval of your grant-making procedures is a one time approval of your system of standards and procedures for selecting recipients of grants that meet the requirements of section 4945(g)(1) of the Code. Thus, approval will apply to succeeding grant programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request.

We are informing the Ohio TE/GE 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.

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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,

/s/ Gerald V. Sack
Gerald V. Sack

Manager, Exempt Organizations
Technical Group 4