Determination 1026037: IRS approved a private foundation’s scholarship program

Plain-English summary

The IRS approved a private foundation's procedures for awarding scholarships to high school graduates born in a particular state. The foundation planned to award nine to thirteen scholarships each year for tuition, textbooks, and eligible room and board, using objective and nondiscriminatory criteria. The determination concluded that grants made under the approved procedures would not be taxable expenditures under section 4945(d)(3) and that the awards would generally be excludable from recipients' income under section 117, subject to its limitations. The approval was limited to the described procedures and required the foundation to maintain records and report future material changes.

Ruling snapshot

• Question: Did the foundation's proposed scholarship-grant procedures satisfy the advance-approval requirements of section 4945(g)?
• Outcome: approved
• Key authorities: IRC §§ 74, 117, 170, 4945, 4946, 501, 509, and 6110(k)(3); Treas. Reg. § 53.4945-4

Full text (IRS public release)

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

Department of the Treasury

Number: 201026037
Release Date: 7/2/2010

Employer Identification Number:

Date: April 7, 2010

Contact Person - ID Number:

Contact Telephone Number:

LEGEND UIL = 4945.04-04

B= Foundation
C= State
x= Scholarship Amount

Dear [illegible]:

We have considered your request for advance approval of your grant-making program
under section 4945(g)(1) of the Internal Revenue Code, dated July 6, 2009.

Our records indicate that you, B, 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 B will operate a scholarship program. The purpose of the
program is to provide scholarships to high school graduates born in the state of C. B
expects to award nine to thirteen scholarships per year in the amount of x, made payable
to a qualified educational institution. The grants would be specifically for tuition,
textbooks, and on-campus or school operated room and board services at a vocational
institute, university, or college.

Eligible applicants will be high school graduates born in the state of C. The scholarships
are advertised on B’s website.

To apply, an individual must complete an application packet that is postmarked no earlier
than January 1, and no later than June 1, of the year of graduation. Incomplete
applications will not be considered eligible for scholarships. A complete application
packet includes 1) the application form, 2) an applicant’s statement, 3) employment
history, 4) contact information for three references, 5) a copy of a certified birth certificate
of the applicant, 6) a copy of the acceptance letter from the institution the applicant will
be attending, and 7) a complete copy of their most recent high school transcript.

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Applications for the continuation of scholarships will include a complete application
packet as outlined above, plus the year’s end transcript from the institution the applicant
attends. Scholarships shall be awarded by August 15th.

The selection committee consists of two law professionals who are familiar with B. The
selection criteria will be: (a) academic performance (past and present), (b) community
participation, (c) financial need, and (d) not be a disqualified person as defined in section
4946(a) of the Code.

Scholarships and Grants will be awarded by the selection committee. Selection is made
on a nondiscriminatory, objective basis based on the aforementioned criteria.

An applicant will be notified via US Mail of their acceptance and further outlining the
requirements to maintain the scholarship.

The procedures for the confirmation of the terms and conditions of the award are as
follows: Each recipient will be required to sign and return to B an attachment to the letter
outlining the terms of the scholarship.

B will pay scholarship funds directly to the educational institution. Such arrangement will
include an agreement with the educational institution that the funds will be used to defray
the recipient’s expenses for tuition, textbooks and on-campus or school operated room
and board services.

Any portion of scholarship funds not used during the scholastic year of the designated
scholarship must be returned to B. Failure to comply with these terms will require the
scholarship recipient to repay B for the entire scholarship. Random reviews of the
scholarship amount used, details of how it was used and confirmation that the student
completed their courses will be held at the discretion of B.

B will retain all records relating to individual grants, including information obtained to
evaluate grantees, identify whether a grantee is a disqualified person, establish the
amount and purpose of each grant, and establish that B undertook the supervision and
investigation of grants.

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);

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(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(k)
(3) of the Code provides that it may not be used or cited as a precedent.

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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