PLR 200850034: a donor's will set the scholarship criteria, and the not-precedent sentence prints twice with two different subsections

Plain-English summary

A private foundation asked the IRS to bless its scholarship program in advance. The letter grants that request. It opens by saying it responds to a letter of March 17, 2008, "requesting advance approval of your grant procedures under section 4945(g) of the Internal Revenue Code." The approval is dated 8/29/2008, released 12/12/08, and signed by Robert Choi as Director of Exempt Organizations, Rulings and Agreements, from the Cincinnati office at P.O. Box 2508, Cincinnati, OH 45201. The ruling sets a start date rather than leaving one open: "The effective date of your scholarship program for the awarding of grants is August 1, 2008."

The structure is a foundation that does not run its own program. The foundation is the legend token B. The grants are "administered, supervised, and paid out by C", a separate organization that is exempt under section 501(c)(3) and is "classified as a publicly supported organization". The scholarship fund itself is D. The letter then lists sixteen bulleted services C performs, running from writing and annually reviewing the program guidelines, through designing a brochure and processing applications, to notifying colleges of recipient names and award amounts, maintaining records on all recipients, reporting to the donor on student progress, and finally the plainest line in the document: "C bills donor in June of each year."

The criteria come from a will. "D was established by K in memory of her husband." The letter reproduces what she asked for, including that "the committee give special consideration to students who desire to prepare themselves for the Christian ministry, the practice of law, or the practice of medicine". That instruction is carried into the operating standards, where an applicant must be studying law, medicine or the ministry, must "Have a minimum cumulative GPA of 2.0 on a 4.0 scale.", and must show character, academic achievement and financial need. "Any full time student of the below mentioned educational institutions are eligible" who meets those terms, and "Participating educational institutions will be E, F, G, H and J." On volume, "B expects to award approximately 40 scholarships each year", though every dollar figure is redacted to the legend token x.

Selection is deliberately spread across the schools. "The Scholarship Selection Committee consists of a representative of the Trustee and two representatives each of the participating educational institutions of E, F, G, H and J." One school is nonetheless the funnel for everything: "All contacts to the Scholarship Selection Committee and application for scholarship awards must be made through E’s Financial Aid Office." The self-dealing bar reaches relatives of committee members and of disqualified persons "as a first cousin or nearer relative".

The law section is short and conventional. "Sections 4945(a) and (b) of the Code impose certain excise taxes on “taxable expenditures” made by a private foundation." That sentence is the only place subsection (b) is cited, in compound form with subsection (a). Section 4945(d)(3) makes a grant to an individual for travel or study a taxable expenditure unless it satisfies subsection (g), and section 4945(g) supplies three ways to satisfy it, keyed to section 117(a), section 170(b)(1)(A)(ii) and section 74(b). The procedural test is the regulation: "Section 53.4945-4(c)(1) of the Regulations provides that to secure approval, a private foundation must demonstrate that:" an objective and nondiscriminatory selection process, a procedure calculated to produce the financed activity, and a plan to obtain reports. The Service finds all three met, and adds that "awards made under your procedures are excludable from the gross income of the recipients subject to the limitations provided by section 117 of the Code."

Two conditions attach, and both are stated twice. The first pass says "there will be no material change in the facts upon which it is based." and that "no grants will be awarded to foundation managers, or members of the selection committee"; the second says "there will be no material changes in the facts upon which it is based." and that "no grants will be awarded to your organization's creators, officers, directors, trustees, or members of the selection committee". The same doubling hits the scope limit: "The approval of your award program procedures herein constitutes a one-time approval of your system standards and procedures" appears, and then "The approval of your grant-making procedures is a one time approval of your system of standards and procedures" appears again, hyphenated the first time and not the second. The first pass calls the letter a determination and the second calls it a ruling. The substance does not change between the two, but a reader should know the document says everything twice.

The not-precedent sentence is printed twice with two different subsections. Once it says, "Section 6110(j)(3) of the Code provides that it may not be used or cited as a precedent." The other says, "Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent." One says "a precedent" and the other says "precedent". Each appears once, with a different sentence identifying the document as a determination or ruling. Both forms are reproduced below exactly as released.

Other defects are flagged and left alone. The scan prints "programs described above.. Thus," with a double period. Two clauses of the regulation carry a stray vertical bar where the scan lost a tab, as "(ii) | Such procedure is reasonably calculated to result in performance by grantees of the" and "(iii) | The foundation plans to obtain reports to determine whether the grantees performed". A list of exempt capacities prints "musical , scientific" with a space before the comma. The description of the administrator reads "individual philanthropist’s scholarship" where a plural was probably meant. A running header of the word Foundation over the letters EIN interrupts the body four times, once at each page break. None of these were corrected. They are ambiguous between a source typo and a scanner artifact, and this corpus repairs only unambiguous character misreads.

No text was changed. The usual candidates for repair in this release, the Intemal for Internal misread and the copyright symbol standing in for a parenthesized c, do not occur here, so the full text below is the extracted scan exactly as released.

The letter cites no cases. Its Code and regulation citations are reproduced exactly as printed, and no citation has been supplied or corrected.

The index row gives UILC 4945.04-04 and the subject Grants to Individuals, and the document itself prints "Uniform Issue List Number:" followed by "4945.04-04".

Ruling snapshot

• Question: Do a private foundation's scholarship procedures, taken from a donor's will and administered by a separate publicly supported organization, qualify for advance approval so that the grants are not taxable expenditures?
• Outcome: Approved. The procedures comply with section 4945(g), awards under them are not taxable expenditures under section 4945(d)(3), and the awards are excludable from recipients' gross income within the limits of section 117.
• Key authorities: Sections 4945(a) and (b), 4945(d)(3), 4945(g) and 4945(g)(1); sections 74(b), 117, 117(a), 170(b)(1)(A)(ii) and 170(c)(2)(B); section 501(c)(3); and Regulations section 53.4945-4(c)(1).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508 Director, Exempt Organizations

Cincinnati, OH 45201

Release Number: 200850034 Contact Person:
Release Date: 12/12/08

Date: 8/29/2008 Identification Number:
Telephone Number:
Employer Identification Number:

Uniform Issue List Number:
4945.04-04

Legend:

B= Organization
C= Organization
D= Scholarship Fund
E= College

F= University
G= University
H= University
J= University
K= Person

L= Organization
x= $amounts

Dear

This is in reference to your letter of March 17, 2008, requesting advance approval of your
grant procedures under section 4945(g) of the Internal Revenue Code.

The effective date of your scholarship program for the awarding of grants is August 1,
2008. This date was chosen based on the facts that your scholarship program now complies
with section 4945(g) of the Internal Revenue Code.

The information submitted indicates that grants funded by you, private foundation B, will be
administered, supervised, and paid out by C. C is exempt from Federal income tax under
section 501(c)(3) of the Internal Revenue Code and has been classified as a publicly supported
organization. The name of your scholarship program is D.

C provides corporation, foundations, trust funds and individual philanthropist’s scholarship

Foundation
EIN

selection and administration management.

C will offer the following services in administering the scholarship program.

- C writes a set of guidelines for the administration of a scholarship program, based on the
desires of the donor. C annually reviews those guidelines, advising the donor with regard to
updating any requirements.

- C distributes these guidelines to appropriate individuals per instructions from the donor.

- C designs a brochure, if desired by the donor, to be distributed to each facility to be given
to potential applicants. Applications packets are updated annually. Printing is handled by C.
Applications packets are available for online processing.

- C receives and processes the application packets.

- C handles all correspondence and any special circumstances and questions from
applicants, the family, and/or high school and college administrators.

- C has computer programs designed to assist in evaluating academic and financial
materials received from applicants.

- C enlists the aid of a Scholarship Selection Committee

- C notifies the donor of the names and addresses of the current year winners. The donor
then notifies these winners of their selection in whatever manner they choose.

- C follows up with additional forms and information for the winners.

- C requests information from prior scholarship winners and determines eligibility for
renewal.

- C notifies renewal recipients of decisions.
- C notifies unsuccessful candidates

- C notifies all colleges with recipient names, social security numbers, award amounts and
methods of payment.

- C maintains and reviews records on all recipients annually.
- C provides an annual report to donor on progress of students.
- C bills donor in June of each year.

D was established by K in memory of her husband. In her will, K requested the following

Foundation
EIN

criteria to be used by the Selection Committee in the awarding of scholarships. It was her
desire that the committee shall give consideration to scholastic records and ability of applicants,
as well as to character and achievements, and all around fitness and worthiness. K desired that
the committee give special consideration to students who desire to prepare themselves for the
Christian ministry, the practice of law, or the practice of medicine and who have displayed
qualities which, in the opinion of the committee, fit them for successful careers in such
professions.

Any full time student of the below mentioned educational institutions are eligible who can
meet the requirements as stated in the will as quoted herein.

- Be studying in the field of Law, Medicine or the Ministry.

- Have a minimum cumulative GPA of 2.0 on a 4.0 scale.

- Demonstrate high personal character.

- Demonstrate academic ability and achievement.

- Demonstrate financial need.

Participating educational institutions will be E, F, G, H and J.

Each year B will make scholarships funds available to selected students attending the
colleges and universities of E, F, G, H and J. B expects to award approximately 40 scholarships
each year and that each scholarship will be between the amounts of x.

Scholarships may be awarded for any stated period and for varying amounts as
determined by the Scholarship Committee. Such awards may be adjusted annually in

accordance with financial need of the students.

The Scholarship Selection Committee consists of a representative of the Trustee and two
representatives each of the participating educational institutions of E, F, G, H and J.

All contacts to the Scholarship Selection Committee and application for scholarship awards
must be made through E’s Financial Aid Office.

No scholarships will be awarded to any individual who is related by blood, adoption or
marriage to any member of the Scholarship Selection Committee or any disqualified person of B
as a first cousin or nearer relative.

Sections 4945(a) and (b) of the Code impose certain excise taxes on “taxable
expenditures” made by 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

Foundation
EIN

other similar purposes by such individual, unless such grant satisfies the requirements of
subsection (g).

Section 4945(g) of the Code provides that section 4945(d)(3) shall not apply to individual
grants awarded on an objective and nondiscriminatory basis pursuant to a procedure approved
in advance if it is demonstrated that:

(1) 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);

(2) The grant constitutes a prize or award which is subject to the provisions of
section 74(b), if the recipient of such prize or award is selected from the general public,
or

(3) The purpose of the grant is to achieve a specific objective, produce a report or similar
product, or improve or enhance a literary, artistic, musical , scientific,
teaching, or other similar capacity, skill, or talent of the grantee.

Section 53.4945-4(c)(1) of the Regulations provides that to secure approval, a private
foundation must demonstrate that:

(i) Its grant procedure includes an objective and nondiscriminatory selection process;

(ii) | Such procedure is reasonably calculated to result in performance by grantees of the
activities that the grants are intended to finance; and

(iii) | The foundation plans to obtain reports to determine whether the grantees performed
activities that the grants are intended to finance.

Based on the information submitted and assuming your award programs will be conducted
as proposed with a view to provide objectivity and nondiscrimination in making the awards, we
have determined that your procedures for granting the awards comply with the requirements
contained in section 4945(g) of the Code and that awards granted in accordance with such
procedures will not constitute “taxable expenditures” within the meaning of section 4945(d)(3).

In addition, we have determined that awards made under your procedures are excludable
from the gross income of the recipients subject to the limitations provided by section 117 of the
Code.

This determination is conditioned on the understanding that there will be no material
change in the facts upon which it is based. It is further conditioned on the premise that no
grants will be awarded to foundation managers, or members of the selection committee, or for a
purpose that is inconsistent with the purpose described in section 170(c)(2)(B) of the Code.

The approval of your award program procedures herein constitutes a one-time
approval of your system standards and procedures designed to result in awards which meet the
requirements of section 4945(g)(1) of the Code. This determination only covers the grant
programs described above.. Thus, approval shall apply to subsequent award programs only as
long as the standards and procedures under which they are conducted do not differ materially

Foundation
EIN

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 should maintain
adequate records and case histories so that any or all award distributions can be
substantiated upon request by the Internal Revenue Service.

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

You must report any future changes in your grant making procedures. Please keep a
copy of this letter in your permanent records.

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.

This ruling will be made available for public inspection under section 6110 of the Code after
certain deletions of identifying information are made. For details, see enclosed Notice 437,
Notice of Intention to Disclose. A copy of this ruling with deletions, that we intend to make
available for public inspection, is attached to Notice 437. If you disagree with our proposed
deletions, you should follow the instructions in Notice 437.

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 Choi
Director of Exempt Organizations
Rulings and Agreements

Enclosure: Notice 437