PLR 1020024: IRS approved a private foundation's scholarship grant program

Plain-English summary

The IRS approved a private foundation's program to award scholarships and grants for individual study at accredited colleges and universities. The program required applicants to live in the specified community, attend an accredited school, demonstrate financial need, study full time, and meet minimum grade-point averages. The IRS found that the objective and nondiscriminatory procedures satisfied IRC § 4945(g)(1), so awards made under those procedures would not be taxable expenditures under § 4945(d)(3). The approval was conditioned on no material change in the facts, no grants to foundation managers or selection committee members, and compliance with the stated charitable purpose and recordkeeping requirements.

Ruling snapshot

• Question: Could the foundation receive advance approval for its scholarship and individual grant procedures under IRC § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 4945(d)(3), 4945(g), 501(c)(3), 117, 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: 201020024
Release Date: 5/21/2010

Date: February 22, 2010

Employer Identification Number:
Contact Person - ID Number:
Contact Telephone Number:

UIL: 4945.04-04
LEGEND
X= Name of Organization
Y= Name of Program
Z= Community

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 August 25, 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 dated August , 20 indicates that X will operate a grant-making program
called Y.

The purpose of X is to provide academic scholarships to the residents of the community
of Z.

The purpose of Y is to provide scholarships or grants for individual study at an
educational institution towards a degree program at an accredited college or university.

Applicants must meet all the following requirements:

• Be a resident of Z.

• Be enrolled in an accredited college or university.

• Be able to demonstrate financial need.

• Be registered as a full time student, pursuing an Associate degree or higher.

• Undergraduate students must have a minimum 2.0 cumulative GPA.

• Graduate students must have a minimum 3.0 cumulative GPA.

2

All applicants that apply timely and meet the eligibility criteria listed above will receive a
scholarship.

The scholarship award is sent to the financial aid office at the college or university the
recipient is attending and is instructed to release the award only if the student is enrolled
as a full time student and is in good academic standing. Recipients failing to earn the
number of credit hours equal to a full time academic workload in an academic year will
not be eligible to receive the award until they earn credit hours equal to a full time
workload in a given semester. Recipients not maintaining the required cumulative GPAs
will not be eligible to receive the award until they maintain the required GPA.

Official transcripts are required for the academic year in which the recipient has received
the award prior to reapplying for the award for the next academic year.

X will investigate any possible misuse of funds by a recipient, withhold further funds
during the investigation if a misuse of funds is discovered, and seek recovery of misused
funds.

X will maintain records of applicants, grantees’ performance reports and other follow-up
data obtained in administering Y.

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.

3

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.

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