PLR 201001021: IRS approves a private foundation's scholarship grant procedures

Plain-English summary

A private foundation asked the IRS to approve procedures for a scholarship program benefiting students in a specified state. The program considered academic performance, financial need, community service, work ethic, personal initiative, and curiosity, and paid awards directly to qualifying educational institutions. The IRS approved the procedures under IRC § 4945(g), so grants made under them would not be taxable expenditures under § 4945(d)(3), assuming the facts and procedures did not materially change. The IRS also stated that scholarship awards are excludable from recipients' gross income subject to IRC § 117.

Ruling snapshot

• Question: Did the foundation's proposed scholarship selection and oversight procedures qualify for advance approval under IRC § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 74(b), 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(d)(3), 4945(g), and 6110(j)(3); Treas. Reg. § 53.4945-4(c)(1), (c)(6)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508

Cincinnati, OH 45201

Release Number: 201001021 Employer Identification Number:

Release Date: 1/8/10

Date: 10/14/09 Contact Person - ID Number:
Contact Telephone Number:

LEGEND UIL 4945.04-04

X= Organization
Y= Grant Program
Z= State

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 of X is to make grants to charitable organizations that promote and assist cultural, health, and medical programs.

The purpose of Y is to provide financial support to students who demonstrate the potential to excel in post secondary educational opportunities.

The organization plans to grant scholarships to students within the state of Z. The amount of the grants awarded will depend upon the financial need of the applicant. The grants are to be used for fees, books, supplies, and equipment required for the course of study they will be taking at a qualified educational institution. The awards will be paid directly to the educational institution the recipient is attending.

X will promote Y on their website and through the schools within the state.

The criteria needed to apply for Y include academic excellencedemonstrated by a minimum GPA of 3.0 or higher or GED score of 260 or higher; financial need, community service, work ethic, demonstration of personal initiative, and intense personal curiosity. The candidates need to provide a recommendation from their school counselor or professor, transcripts, application, biographical record, description of school and community services, volunteer services and other responsibilities the applicant may have.

The trustees will evaluate all materials obtained and make selections.

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Each recipient must submit a report within two weeks of the end of the school term on how they used the funds given to them. Annual transcripts are requested to indicate the courses and grades of the recipient. If the requested information has not been provided X will conduct an investigation and withhold further payments until it is determined the funds were used for educational purposes. If funds were used for purposes other than educational, X will take steps to recover those funds.

X will maintain records related to the scholarship program consistent with the requirements of Treasury Regulations Section 53.4945-4(c)(6).

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

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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