PLR 200518080: Foundation's scholarship and related grant procedures approved

Plain-English summary

A private foundation asked the IRS to approve procedures for grants to graduating high school seniors from low-income families who had overcome hardships. Its program included college scholarships, limited repayment of recipients' educational loans after graduation, and support for charitable internships while they pursued degrees. The IRS approved the procedures under IRC §§ 4945(g)(1) and 4945(g)(3), finding that the selection criteria, restrictions on recipients, and reporting and recovery procedures met the requirements for individual grants. Grants made under those procedures would not be taxable expenditures under § 4945(d)(3). The approval depends on the foundation following the proposed procedures and applies to later programs only while their standards and procedures do not materially differ.

Ruling snapshot

• Question: Do the foundation's scholarship, educational loan reduction, and internship grant procedures qualify for advance approval?
• Outcome: Approved, subject to the stated conditions.
• Key authorities: IRC §§ 4945(d)(3), 4945(g)(1), 4945(g)(3); Treas. Reg. § 53.4945-4(c).

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 200518080

Release Date: 5/6/2005

UIL: 4945.00-00

Date: Contact Person:
02/09/05
ID Number:

Telephone Number:

Employer Identification Number:

Legend:

M= x= y= z=

Dear --------------

This is in reference to your letter of April 2, 2004, requesting advance approval of your grant procedures under section 4945(g)(1) and 4945(g)(3) of the Internal Revenue Code.

You are recognized as exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code and have been classified as a private foundation as defined by section 509(a) of the Code.

The name of your scholarship program is M. The purpose of your scholarship program is to allow graduating high school seniors, who are from low-income families and who have demonstrated strength of character and initiative in overcoming obstacles and hardships, to seek a college degree.

Your scholarships will be awarded to recipients for study toward a degree at an educational organization described in section 170(b)(1)(A)(ii) of the Code. All high school seniors are eligible to apply for your scholarships. Your scholarship recipients must use the funds for tuition, books, fees, supplies, equipment or on-campus room and board. You may also give the recipients a computer in addition to their monetary awards. Your funds may be used in certain cases to repay the educational loans of the recipients that were obtained from other sources and after they have obtained a degree. Your funds may also be used in certain instances by the recipient in a summer or semester internship at a charitable organization while obtaining a degree. You state that your scholarship program is not employer related.
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You initially plan to award up to x scholarships in the amount of $y per year per recipient with the maximum amount of $z per recipient. The above number of scholarships and the amounts may change in the future and may vary to each recipient. A recipient may renew your annual award up to five times if a baccalaureate degree has not been obtained; the maximum amount has been reached; and not more than six years have lapsed from the initial award.

Each applicant must be a high school senior and demonstrate the need for financial aid.
Applicants must be accepted into an accredited college including a community and junior college or university in the United States. Applicants that plan to attend a technical college or participate in a vocational program do not qualify for a scholarship. You may require that applicants be citizens of the United State.

You will be selecting the scholarships with possible assistance of an approved third-party entity or designated selection committee. The approved third-party entity or designated selection committee will assist you in processing the applications, gathering and reviewing data, and other related selecting activities. The scholarship recipients will be selected on the following criteria:

1. Graduation from an accredited high school;
2. Grade point average;
3. Financial need;
4. Demonstration of strength of character or initiative in overcoming obstacles and
   hardships;
5. Acceptance at an accredited college or university as described in section 170(b)(1)(A)(ii)
   of the Code.
6. Teacher or other third-party recommendations.

More weight may be given to financial need, demonstration of strength of character or initiative in overcoming obstacles and hardships, and teacher or other third-party recommendations than is given to grade point averages. None of your scholarships may be awarded to the children of your Trustees of officers, to the children of any disqualified person or to the children of the Selection Committee members or children of persons aiding in the selection process.

You plan to receive reports from those scholarship recipients which you do not directly pay their scholarship funds to the respective college or university. You will investigate and seek recovery of any misuse of funds.

Section 501(c)(3) of the Code provides for the exemption from federal income tax of organizations organized and operated exclusively for charitable, scientific, or educational purposes, no part of the net earnings of which inures to the benefit of any individual.

Section 1.501(c)(3)-1(d)(2) of the Income Tax Regulations provides that the term "charitable" is used in section 501(c)(3) in its generally accepted legal sense. "Charitable" as used in its generally accepted legal sense includes advancement of education.

Section 4945(a) and (b) of the Code impose certain excise taxes on expenditure defined as taxable expenditures by section 4945(d).
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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 organization described in section 170(b)(1)(A)(ii).

Section 4945(g)(3) of the Code provides that section 4945(d)(3) shall not apply to an individual grant the purpose of which is to achieve a specific objective, produce a report or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee.

Rev. Rul. 77-434, 1977-2 C.B. 420, provides that long-term, low-interest educational loans made by a private foundation under a program that specifically limits the use of the funds to furtherance of the recipient’s education at an educational institution described in section 170(b)(1)(A)(ii) of the Code are individual grants within the meaning of section 4945(g)(3).

Section 53.4945-4(c)(1) of the Foundation and Similar Excise Taxes Regulations provides that to secure approval for a grant-making procedure, a private foundation must demonstrate to the satisfaction of the commissioner that:

(a) The grant procedures includes an objective and nondiscriminatory selection process;

(b) The procedure is designed to result in the performance of the activities intended to be financed; and

(c) The foundation will obtain reports to determine whether the grant funds are being properly used. Reports are not required if the foundation pays the scholarship grants to an educational institution. See sections 53.4945-4(c)(5) and 53.4945-4(c)(7) of the Foundation Excise Tax Regulations.

Section 53.4945-4(c)(4) of the Foundation and Similar Excise Taxes Regulations provides that a foundation is under a duty to investigate and attempt to recover any misuse of grants.

Since you are aiding students to attend and graduate from college, your scholarship program; your loan reduction program; and your intern program would be a charitable activity of advancing education under section 501(c)(3) of the Code.
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Based on the information submitted, and assuming your scholarship procedures will be conducted as proposed, we rule that your procedures for awarding scholarships; loans and intern program comply with the requirements contained in section 4945(g)(1) and 4945(g)(3) of the Code because:

(a) Your scholarship procedures; loan reduction; and intern program include an objective and nondiscriminatory selection process. Your applicants are rated by objective and nondiscriminatory criteria by persons experienced in rating of students on their accomplishments and potential.

(b) Your recipients must be enrolled in a degree program to receive your scholarship grants. The recipients must complete their degree program before they are eligible for your loan reduction program. The recipients must be completing their degrees before they are eligible for your intern program. Thus, your procedures are designed to result in the performance of the activities that you intend to finance.

(c) You will satisfy the report requirement by paying some of your scholarship grants directly to the respective College or the respective University. You will obtain reports to determine whether the scholarships that are pay directly to the recipients, paid for your loan reduction program and paid for your intern program are being properly used and will not continue payments if the recipient’s performance is not satisfactory.

You have submitted information showing that you will investigate and seek recovery of any misuse of your grants.

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 your scholarship grants, loan reductions and intern program, we rule that your grants comply with requirements of section 4945(g)(1) and 4945(g)(3) 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 with 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) and 4945(g)(3) 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.
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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.

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,

Lois G. Lerner
Director, Exempt Organizations
Rulings & Agreements