PLR 1020023: IRS approved stipends for students in summer internships

Plain-English summary

The IRS approved a private foundation's program to provide selected undergraduate students with one-time stipends for summer living expenses while they participate in internships. Students with unpaid internships could receive the full stipend, while students whose internships paid less than the stipend could receive the difference. The IRS found that the program served a specific educational objective and improved students' scholarly, academic, and professional skills. Approval depended on objective and nondiscriminatory selection, supervision and reporting, recovery procedures for misused funds, and no material change in the facts.

Ruling snapshot

• Question: Could the foundation receive advance approval for stipends supporting students' summer internships under IRC § 4945(g)(3)?
• Outcome: Approved
• Key authorities: IRC §§ 4945(d)(3), 4945(g)(3), 501(c)(3), 509(a), 170(b)(1)(A)(ii), 170(c)(2)(B), and 6110(j)(3); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Department of the Treasury

Number: 201020023
Release Date: 5/21/2010
Employer Identification Number:

Date: February 25, 2010
Contact Person - ID Number
Contact Telephone Number:

UIL: 4945.04-04
LEGEND

X= Name of grant program
Y= Name of scholarship program
Z= Name of scholarship program

Dear :

We have considered your request for advance approval of a grant-making
program under section 4945(g)(3) of the Internal Revenue Code, dated
July 30, 2009.

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

Your letter indicates that you will operate a grant-making program named the X
to provide selected undergraduate students with small stipends to cover summer
living expenses, enabling them to participate in summer internships. Students
with unpaid internships would receive the full stipend, while students with
internships that pay an amount less than the stipend would receive the difference
between the stipend and the amount the student received from the internship.
These stipends will enable the recipient to achieve a specific educational
objective and to improve or enhance their scholarly capacity and academic and
professional skills. These stipends will be provided to lower income students,
who typically need to earn money during the summer and the school year and
are less likely than their wealthier peers to participate in internships. The
recipients of the stipend will be chosen from among undergraduate students who
received educational assistance under the Foundation’s Y or Z, that have already
received advance approval from the IRS. The Stipends will be provided in
addition to the students’ existing scholarships from the Foundation. The
primary selection criteria for the X shall include, but are not limited to, the
applicant’s academic standing at their institutions, acceptance into an internship
program, academic achievement and financial need.

All recipients must be enrolled, degree candidates in good academic standing at
accredited educational institutions. The Foundation may enlist either an
independent selection committee composed of individuals with relevant
educational expertise or authorize Foundation staff to review and evaluate all
eligible applicants for recommendation to the Board of Directors. The
Foundation does not discriminate on the basis of race, religion, creed, color, sex,
age, physical or mental disabilities, sexual orientation, or national origin. All
stipends are required to be awarded on an objective and nondiscriminatory basis.

No stipends will be awarded to the Foundation’s founder, creator, officers, board
members, or staff, or their families, or to any disqualified person with respect to
the Foundation.

The Foundation may enter into agreements with independent organizations
(“scholarship consultants”) that will assist the Foundation in promoting its
program, contacting colleges and universities with relevant information on the
program, designing and processing the application, and evaluating the eligibility
of applicants.

The exact number and amount of stipends in a given year will depend on a
number of factors, including the number, qualification, and particular needs of the
applicants. All stipends are one-time awards and not renewable.

The Foundation will require each recipient to furnish a report of his or her
accomplishments, the impact of the internship on his or her personal and
professional development, and the use of the funds received. The Foundation
will require the intern to be supervised by someone at the internship site. The
supervisor may not be related to the recipient. Their supervisor must complete a
report describing the recipient's work and the duration of the internship. If the
Foundation learns that all or any part of the funds from a stipend awarded are
being diverted from their intended purposes, it will take all reasonable and
appropriate steps to recover the funds and/or to ensure restoration of the
diverted funds to the purposes of the X. This would include legal action if
deemed appropriate under the circumstances.

The Foundation will retain complete records with respect to all stipends awarded,
as required by the applicable Treasury regulations. These reports will include all
information obtained by the Foundation to evaluate the applicant, the
identification of recipients, the completed application of each applicant, the
amount of each grant, progress reports from recipients or their supervisors, and
any additional information that the Foundation or its scholarship consultants have
obtained in the course of grant administration process.

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).

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)(3) 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.

We have not considered whether grants made under your procedures are
excludable from the gross income of recipients under section 117(a) of the Code.

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