PLR 1023066: IRS approved a private foundation's scholarship grant program

Plain-English summary

The IRS approved a private foundation's proposed scholarship grant-making program under IRC § 4945(g)(1). The program would provide undergraduate scholarships to students from a specified country who are accepted to an accredited educational institution, with selection based on stated academic, character, promise, school contribution, and financial-need factors. The ruling concluded that awards made under the proposed objective and nondiscriminatory procedures would not be taxable expenditures under IRC § 4945(d)(3), and that the scholarships would be excludable from recipients' gross income subject to IRC § 117. The approval is limited to the described procedures and is conditioned on no material change in the facts.

Ruling snapshot

• Question: Would the foundation's proposed undergraduate scholarship procedures satisfy the advance-approval requirements of IRC § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 4945(a), 4945(d)(3), 4945(g), 501(c)(3), 509(a), 117, 170, and 6110(j)(3); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201023066
Release Date: 6/11/10
Date: 3/18/10
Employer Identification Number:

Contact Person - ID Number:

Contact Telephone Number:

LEGEND UIL 4945.04-04

B= Scholarship Program
C= Educational Institution
D= Country
x= Number

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 May 11,
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, which is
referred to as B. The purpose of B is to provide scholarships that meet the
requirements of section 4945(g)(1) to pursue studies at the undergraduate level at an
accredited educational institution, C.

Candidates are chosen from any applicant to C who are from D. When C receives
applications from students located in D, the applications are forwarded to your
selection committee. All students from D applying to C are considered, provided
that no individual related by blood, adoption, or marriage to any member of the
recommendation committee or any disqualified person as a first cousin or nearer
relative to your organization. There are currently x students from D that attend C.

You will provide only undergraduate scholarship grants. You plan to award five
scholarships annually for varying amounts dependent upon your net income and the
need of the student. The number of scholarships awarded may change in the future
dependent upon your net income.

Scholarships will be available to students from D who are accepted to C. After
acceptance, the student's financial aid application is forwarded to the
recommendation committee. The student must have a 3.0 GPA or above.
Additional considerations include proficiency of scholarship work, character
qualifications, future promise of the student, overall contributions to the student's
school, and overall financial need for the student, as indicated on the financial aid
application.

2

The recommendation committee is composed of two individuals who are employees
of C who are appointed by your trustees. C refers potential recipients to the
recommendation committee. The recommendation committee reviews financial aid
applications of potential recipients and makes recommendations of who should
receive the scholarship to your trustees. Your trustees then make the final decision
on which recipients will receive the awards.

Scholarships will be paid directly to C. You send a letter to C, instructing them to
refund any unearned portion of a scholarship if a recipient fails to meet any
condition of the scholarship program. The letter also instructs C to notify your
trustees if any term or condition of the scholarship program is not met.

You will retain information and documentation records of recipients of
scholarships.

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.

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