PLR 1027059: The IRS approved a private foundation's scholarship grant procedures

Plain-English summary

The IRS approved a private foundation's proposed program to award one-time scholarships to graduating seniors of a school or residents of a school district. The foundation planned to use an objective scoring process, require applications and supporting materials, pay scholarships directly to recipients after proof of college enrollment, and monitor how the grants were used. The IRS determined that awards made under these procedures would not be taxable expenditures under IRC § 4945(d)(3) because the procedures met the requirements of § 4945(g). The IRS also determined that the awards would be excludable from recipients' gross income subject to the limits of § 117.

Ruling snapshot

• Question: Could the private foundation's proposed scholarship procedures qualify for advance approval under IRC § 4945(g)(1)?
• Outcome: approved
• Key authorities: IRC §§ 4945, 4945(d)(3), 4945(g), 117, 170, 501(c)(3), and 509(a); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Director, Exempt Organizations P.O. Box 2508
Cincinnati, Ohio 45201
Release Number: 201027059
Release Date: 7/9/10
Date: 4/13/10
Employer Identification Number:

Person to Contact - ID#:

Contact Telephone Number:

Phone

UIL Code
4945.04-04

LEGEND

B = Name of School
D = Name of School District
x = $Amount

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
October 31, 2009.

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

Your letter indicates that you will operate a grant-making program that
will be awarding scholarships to individuals to graduating seniors of B or
students who are residents of D for post high school study. You will
notify the Counselor and Principal of D verbally that scholarships are
available and provide them the scholarship criteria. Approximately 200
plus individuals are eligible on a yearly basis and generally five
scholarships will be awarded in the amount of x each, given on a one-time
basis.

Applications are reviewed by a committee of three or four members of your
Board of Directors as they are received. The Current selection committee
is made up of four members. The Committee uses a ten point scoring sheet
for each candidate. Each application is independently scored and the top
five candidates are awarded scholarships.

Applicants must submit the following:

• An Application Form.

• A One to two (1-2) page essay on “Why did you select your field of
study and how will it benefit yourself as being a productive citizen”

• Two (2) letters of recommendations detailing applicants background,
achievements, leadership abilities, and community involvement. One
(1) letter must come from a teacher or school official.

• A personal résumé which provides information about community
involvement/activities, school involvement/activities, and work
experience, if any.

• Applications must be received on or before a preset deadline each
year.

Members of the selection committee and their relatives are not eligible to
apply for the scholarship program.

All scholarships will be paid directly to the recipient. The recipient is
required to show proof of enrollment in a college before payment is made to
the recipient.

The Board will arrange to receive and review grantee reports, investigate
any suspected diversions of scholarships from their intended purpose and
take all reasonable steps to recover the diverted funds, ensure
scholarships are used for their intended purpose and withhold further
payments to that individual if necessary.

You will maintain records for all selected recipients that will include
information obtained to evaluate grantees, identifying whether a grantee is
a disqualified person, amount and purpose of each grant, proof of
enrollment, and any applicable investigation of diverted funds.

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, effective
October 31, 2009, 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 as
of October 31, 2009, 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, October

31, 2009, 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