Determination 200912033: A graduate scholarship program received advance approval

Plain-English summary

A private foundation proposed renewable merit scholarships for graduates of a specified school who attended qualified higher-education institutions. An independent nonprofit administrator collected applications and handled notices, while a committee of school principals and a foundation trustee selected nominees under conflict-of-interest procedures. Scholarship payments reimbursed recipients for documented tuition, fees, and books after the school year, and renewals required transcripts. Misused funds had to be returned, and the administrator supplied the foundation with records for oversight. Effective February 11, 2008, the IRS approved the objective and nondiscriminatory procedures under section 4945(g), making compliant awards nontaxable expenditures and excludable within section 117's limits.

Ruling snapshot

• Question: Did the foundation's merit-scholarship selection, reimbursement, and monitoring procedures meet the advance-approval rules?
• Outcome: Approved: awards following the procedures would not be taxable expenditures and would receive section 117 treatment subject to its limits.
• Key authorities: IRC §§ 117, 4945(d)(3), 4945(g); Treas. Reg. § 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

Number: 200912033
Release Date: 3/20/2009

Employer Identification Number:
XX-XXXXXXX

Date: December 22, 2008

Contact Person - ID Number:

XXXX Contact Telephone Number:

UIL: 4945.04-04

LEGEND:

W = XXXX
X = XXXX
Y = XXXX
Z = XXXX
B = XXXX
C = XXXX

Dear

We have considered your request for advance approval of your grant-making program under section 4945(g)(1) of the Internal Revenue Code, dated February 11, 2008.

Our records indicate that W is exempt from Federal income tax under section 501(c)(3) of the Code — classified as a private foundation and recognized as a non-exempt charitable trust.

Your letter indicates that W will operate a grant-making program called X.

The purpose of X is to enhance access to higher education, specifically for graduates of Y. Only graduates of Y will be able to apply for the scholarship, but the W looks to assist a number of those graduates through this scholarship. Twenty-one recipients are expected to receive assistance in the first year of the X. The recipient must attend a qualified educational institution as described in 170(b)(1)(A)(ii). The amount of the scholarship will not exceed B on an annual basis. The scholarship is renewable annually and the total given to each recipient will not exceed C. The funds are to be used for tuition, fees, or books.

Each potential recipient must complete an application process and scholarships will be granted based on academic merit. All applications will be sent to Z, an independent, non- profit scholarship administration service. The Z will then forward the applications to the selection committee, which is comprised of the head principals of the Y and a trustee of W. After the selection is made, the committee provides the Z with a list of the nominees, and after final approval the Z will inform the winners as well as the unsuccessful candidates. The X will be awarded on an objective and non-discriminatory basis. The W has procedures in place to avoid all conflicts of interests within members of the selection committee and the Z.

a

The scholarship funds are given on a reimbursement basis. In order to receive the funds, at the end of the school year the recipient is to provide paid receipts for their tuition, fees, and books to the Z. The recipient will then receive the scholarship funds directly. Those who wish to renew their scholarship, in addition to providing paid receipts, must also provide transcripts of courses last taken. In the event the scholarship funds have been determined to be misused, the scholarship will be terminated and all funds are to be returned to the X. The Z will provide the W with all necessary information for documentation and recordkeeping purposes.

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 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 pa é gr 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, effective February 11, 2008, 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).

3

In addition, we have determined that awards made under your procedures as of February 11, 2008, 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, effective February 11, 2008, 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 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.

We have sent a copy of this letter to your representative as indicated in your power of attorney.

If you have any questions, please contact the person whose name and telephone number are shown above.

Sincerely yours,

Director of Exempt Organizations