PLR 1046017: IRS approves a private foundation's scholarship program

Plain-English summary

The IRS reviewed a private foundation's proposed scholarship program for deserving young women who would attend a specified university. The program used a selection committee, objective eligibility criteria, application materials, enrollment checks, academic reports, and procedures for returning unused funds. The IRS concluded that the proposed procedures met the requirements for advance approval under section 4945(g)(1), so scholarships awarded under those procedures would not be taxable expenditures under section 4945(d)(3). The IRS also determined that the awards would be excludable from recipients' gross income subject to the limitations of section 117.

Ruling snapshot

• Question: Do the foundation's proposed scholarship procedures qualify for advance approval under section 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 4945(d)(3) and 4945(g)(1); 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

Number: 201046017
Release Date: 11/19/2010

Employer Identification Number:
Date: August 18, 2010
Contact Person - ID Number:

Contact Telephone Number:

LEGEND UIL: 4945.04-04

X= high school
Y= college

Z= university
B= city

C= trustee

Dear

We have considered your request of June 1, 2010 for advance approval of your
grant-making program under section 4945(g)(1) of the Internal Revenue Code.

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

You are administered by C, and you were formed to provide scholarships to
deserving young women graduates of X who will attend Z (originally Y, which is
a part of Z, also was specified).

You indicated that a Stipulation by the Probate Court deleted the specification of

Y. The Stipulation also expanded the eligible recipients to include as a candidate:

“a worthy young woman who is a resident of B and is a graduate of any other
public high school, including magnet, charter or other equivalent high schools as
may be prescribed by state law, located in or serving B, or its corporate
successor and who shall matriculate at Z”. This was further amended to
“encompass women residents of B who graduate from the public high schools of
other municipalities under the ‘Project Choice’ program, as well as women
residents of B who graduate from private high schools within or without B’.

The Scholarship selection committee consists of the Principal of X, the
Superintendent of Schools of B, and the senior trust officer of C. The committee
members acknowledge that they have an understanding of the Internal Revenue

Code provisions concerning private foundations, self dealing, and the
requirement that the scholarships cannot be given to any of their relatives.

The committee shall each year award a scholarship to a female graduate of X
who is admitted to and will attend Z. The scholarship shall continue for so long as
each recipient is attending Z and maintains a satisfactory academic and
disciplinary record, and shall be renewed each academic year upon completion
of the work of the preceding academic year, up to a total of four years.

The total amount of the scholarship awards for any year shall be limited by the
annual net income of the Trust Estate, which funds the scholarships; and the
individual scholarship awards for each year shall be nearly equal in amount, as
the committee determines to be practicable and equitable. There shall be no
more than one scholarship recipient in any college class or year unless the
annual net income of the Trust Estate exceeds the aggregate cost of tuition,
room, board, books, and other miscellaneous fees for four scholarship recipients,
i.e. one in each of the four college class years. If the annual net income exceeds
this amount, then an additional partial or full scholarship may be awarded.

Each year the Scholarship Committee reminds the three schools in B of the
availability of the scholarship and mails the applications to the guidance offices.
The Trust submits press releases to local newspapers, the United Way’s regional
website, and other local public giving foundations and non profit organizations
that work with youth in B.

Eligible recipients will be any worthy young women graduates of X, who are
sincerely desirous of attending Z and who are qualified and have been admitted
as students at Z. The Stipulation approved by the Probate Court indicated that if
there isn’t a graduate of X who qualifies for the scholarship in two consecutive
years, any young woman who is a resident of B and a graduate of one of the
public schools that are located in or serves B will be eligible for the scholarship
if she shall matriculate to Z. It further indicates that if, in two consecutive years,
there isn’t a graduate of X or resident of B that is qualified, then any young
woman who is a resident of B and a graduate of any other high school and shall
matriculate to Z will be eligible for the scholarship. Preference shall always be
given to a graduate of X in order to remain within the intention of the Will that
created the scholarship.

The founder of the trust felt that relatively few girls who graduated from X had the
opportunity to attend college because the poverty level in B is high. The founder
was a graduate of X and Y and set the eligibility requirements and selection
criteria for the program. Because of the high academic requirements of Z, the
number of eligible applicants may be limited. You indicated that the group of
eligible applicants qualified as a charitable class because the charitable purpose
of the grant was maintained.

The selection criteria include:
• Character

• Academic record

• Extracurricular activities
• Sincerity of purpose

• Application to and acceptance into Z
• Preference is given to graduates of X and the 3 public high schools of B

The eligible applicants must complete the application consisting of personal
information, school information, small essay question, and indication that they
have been accepted and plan to attend Z.

The selection committee will review the application of each of the applicants
(interviewing the girls if they deem necessary) and then, based on the
information, determine which one (or more) of the girls would be awarded
scholarships. The Admission Office of Z also may be consulted. The procedure
would be similar to that used by the admission office of any college in deciding
which of many applicants will be admitted.

A letter is sent to inform individuals selected to receive a scholarship. The
recipient is asked to complete and return a form in which she acknowledges that
she is a recipient and agrees to permit C to verify continuing enrollment during
the term of the scholarship.

Z will send to C a transcript as to the student's performance for the college year
just completed, including any disciplinary issues. The committee will review the
report to determine whether a scholarship will be renewed for the next year.
Scholarships would not be renewed if the recipient ceased to be a student at Z or
had an unsatisfactory record. It is understood that Z will promptly notify the
Trustee if any recipient ceases to be a student at Z.

Funds are paid directly to Z. The Scholarship committee relies on Z to determine
that the funds have been appropriately expended for the benefit of the
scholarship recipients. Annual reports will be sent from Z as to the performance
of the Scholarship recipient and the completion of the requirements of her
scholarship. The Bursar’s office at Z would refund any monies not used by the
student back to the Trust. Should a scholarship recipient withdraw from Z, the
Trust will cease funding the student, and the institution will be asked to return a
proportionate amount of the award to the Trust (representing the portion of the
tuition payment made that was not utilized, based on the length of attendance by
the student). Since Z operates on a semester system, and since charges for a
semester are determined in advance, it is possible that the repayment of the
funds to the Trust would be made on a semester basis. Appropriate reports on
the awardees are required. The Trust would investigate any actual or potential
misuse of the funds awarded, and would seek to recover any funds which have
not been used properly.

You agree to maintain records that include the following:

(i) Information used to evaluate the qualification of potential grantees;

(ii) Identification of the grantees (including any relationship of any grantee
to the private foundation);

(iii) The amount and purpose of each grant; and

(iv) All grantee reports and other follow-up data obtained in administering

the private foundation’s grant program.

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).

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.

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