PLR 200935038: Four-year scholarship program approved for medical students

Plain-English summary

The IRS approved a private foundation's four-year scholarship program for qualifying students at a university school of medicine. The foundation will select recipients using criteria that include financial need, practice potential, academic achievement, clinical exposure, community involvement, tenacity, and disqualification status. The university will pre-screen applicants, and the foundation's committee will make the final selection on a nondiscriminatory basis, with preference to ethnic minorities. The IRS concluded that the scholarships would not be taxable expenditures under IRC § 4945(g) and that they would be excludable from recipients' gross income subject to the limitations of IRC § 117. The approval is conditioned on the stated facts and applies to materially similar future programs.

Ruling snapshot

• Question: Does the foundation's four-year scholarship procedure satisfy IRC § 4945(g)(1) so the scholarships will not be taxable expenditures?
• Outcome: Approved
• Key authorities: IRC §§ 4945(a), (b), (d)(3), and (g)(1); Treas. Reg. § 53.4945-4(c)(1); IRC §§ 117 and 170(b)(1)(A)(ii).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508, Room 7008 Exempt Organizations
Cincinnati, OH 45201 Rulings and Agreements

Number: 200935038
Release Date: 8/28/2009

Date: June 4, 2009 Employer Identification Number:
Contact Person - ID Number:

Contact Telephone Number:

LEGEND UIL#: 4945.04-04

X = Foundation

Y = Scholarship

Z = University School of Medicine
x = $ amount annually for # years

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 March 2, 2009.

Our records indicate that X was recognized as exempt from Federal income tax under section 501(c)(3) of the Code and that it is classified as a private foundation as defined in section 509(a).

Your letter indicates that X will operate a grant-making program called Y. The purpose is to provide 4 year scholarships to qualifying students at Z. X expects to award 1 scholarship per year in the amount of x, made payable to Z. Scholarships would be used for tuition.

Eligible applicants will be a student at Z. The scholarship information is sent to all students who have been accepted at Z.

To apply, an individual will submit an essay providing information about their ability to contribute to the educational benefits derived from a diverse student body.

The selection criteria will be: (a) financial need, (b) practice potential, (c) academic achievement, (d) clinic exposure/experience, (e) community involvement/public service, (f) tenacity, and (g) not be a disqualified person as defined in section 4946(a) of the Code.

Candidate’s essays and financial information are pre-screened by Z’s Scholarship Committee, who select 4-6 finalists. Selection is made on a nondiscriminatory basis, with preference to ethnic minorities. These are forwarded to the Scholarship committee at X.

Scholarships will be awarded by the Scholarship Committee, composed of the chairman of the board of X and his appointees. Members are selected from the general public, healthcare community, training institutions and from the current board of X. Announcement of the scholarship award may be published or acknowledged by both X and Z.

X will pay scholarship funds to Z. In years 2 through 4, X receives confirmation from Z that the student is still enrolled and considered a student in good standing prior to release of funding. Z is responsible for maintaining records that substantiate the students’ continued enrollment and good standing. Z is also responsible for notifying X if the student terminates his or her student status or otherwise becomes no longer a student in good standing. In such a case, the scholarship will be withdrawn from the current recipient pro rata for the time of the students’ good standing status. X reserves the right to require the withdrawn funds be returned to X or they may choose to allow the remaining funding to be awarded to one of the remaining finalists provided such student is currently in good standing.

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 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 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,
Robert Choi
Director, Exempt Organizations
Rulings and Agreements
Enclosures:
Sanitized copy of this letter

Notice 437