PLR 200532050: Foundation scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed to fund scholarships that a publicly supported charity would administer and award to students. The charity would handle applications, select recipients, make payments, and report on the program. The IRS approved the grant procedures under section 4945(g)(1), so expenditures following them would not be taxable expenditures. It also ruled that recipient grants would be excluded from income subject to section 117(b)'s limits. Approval extends to later programs only while the standards and procedures remain materially the same, and the foundation must keep adequate records.

Ruling snapshot

• Question: Do the foundation's scholarship procedures qualify for advance approval under section 4945(g)(1)?
• Outcome: Approved, subject to the described procedures and records.
• Key authorities: IRC §§ 117, 4945(d)(3), 4945(g)(1); Rev. Proc. 76-47.

Full text (IRS public release)

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

TAX EXEMPT AND
GO V E R N M E N T E N T I T I E S
DIVISION

Number: 200532050
Release Date: 8/12/2005
235536/SE:T:EO:RA:T1

Date: 05/18/05
Contact Person:

Identification Number:

Telephone Number:
UIL Number: 4945.04-04

Employer Identification Number:

Legend:

C=
D=

Dear ------------:

This is in response to your ruling request of October 14, 2004, requesting advance approval of your scholarship program pursuant to section 4945(g) of the Inte rnal Revenue Code.

Our records show that you are exempt from federal income tax under section 501(c)(3) of the Code and you are a private foundation within the meaning of section 509(a). The scholarships will be administered and supervised by C, (formerly known as D), a publicly supported charity. Under the terms of the agreement, you will make an annual contribution to C to fund scholarships to be awarded by C to eligible students. C will prepare and furnish application forms, receive all applications, determine the recipients and amount to be awarded, notify the recipients of the award, and make payment of the award. C will prepare management reports summarizing program activity and results.

You have agreed to ensure compliance with the appropriate percentage test set forth in Revenue Procedure 76-47, 1976-2 C.B. 670 in the aggregate with respect to all the foundation scholarship programs that are available to the same individuals. You will not require C to consider financial need in the selection of your scholarship recipients.

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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 organization described in section 170(b)(1)(A)(ii). Rev. Proc. 76-47, 1976-2 C.B. 670, provides guidelines to be used in determining whether a grant made by a private foundation under an employer-related grant program to an employee or to a child of an employee of the particular employer to which the program relates is a scholarship or fellowship grant subject to the provisions of section 117(a) of the Code.

The information submitted shows that the C program for the awarding of grants will meet the requirements of the Rev. Proc. 76-47.

Based on the information submitted and assuming your scholarship program will be conducted as proposed with a view to providing objectivity and nondiscrimination in the awarding of grants, we rule that your grants to C for the awarding of scholarship grants to college students 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(d)(3). In addition, we rule that grants made under the program are excludable from the gross income of recipients subject to the limitations provided by section 117(b).

The approval of your grant-making procedures herein constitutes a one-time approval of your system of standards and procedures designed to result in grants that meet the requirements of section 4945(g)(1) of the Code. Thus, approval shall apply to subsequent 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.

Any funds you distribute to individuals must be made on a true charitable basis in furtherance of the purposes for which you are organized. Therefore, you shall maintain adequate records and case histories so that any or all grant distributions can be substantiated upon request by the Internal Revenue Service.

This ruling is based on the understanding that there will be no material changes in the facts upon which it is based. Any changes that may have a bearing upon the

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Foundation’s tax status should be reported to the Ohio Tax Exempt and Government Entities (TE/GE) Customer Service Office, which deals with exempt organizations matters. The mailing address is: Internal Revenue Service, TE/GE Customer Service, P.O. Box 2508, Cincinnati, OH 45201.

We are sending a copy of this ruling to the Ohio TE/GE Office. Because this letter could help resolve any questions about the Foundation’s tax status, the Foundation should keep it with its 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.

Thank you for your cooperation.

Sincerely yours,

Debra J. Kawecki
Manager, Exempt Organizations
Technical Group 1