Determination 1047026: IRS approved a private foundation's scholarship grant-making procedures

Plain-English summary

The IRS approved a private foundation's procedures for awarding scholarships to eligible primary, secondary, undergraduate, and graduate students. The program uses a selection committee and considers academic performance, aptitude, recommendations, interviews, character, ability, and motivation. The foundation must use objective and nondiscriminatory procedures, collect progress reports, and investigate any improper use of grant funds. The IRS determined that awards made under the approved procedures would not be taxable expenditures under section 4945(d)(3), and that awards would be excludable from recipients' gross income subject to section 117.

Ruling snapshot

• Question: Do the foundation's proposed scholarship selection and oversight procedures qualify for advance approval under IRC section 4945(g)(1)?
• Outcome: approved
• Key authorities: IRC §§ 117, 170, 4945(g)(1), 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: 201047026 Employer Identification Number:
Release Date: 11/26/10
Date: September 2, 2010

Contact Person - ID

Contact Telephone Number:

UIL 4945.04-04

LEGEND

W Applicant

= Name of Scholarship Program
Y= Parish

Z= State

Dear

We have considered the request of the applicant, named W, for advance
approval of a grant-making program under section 4945 (g)(1) of the Internal
Revenue Code, dated July 29, 2009.

Our records indicate that VW 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).

The letter request indicates that W will operate a grant-making program
named X, which will be awarding annual scholarships of varying amounts to
eligible primary or secondary school, undergraduate, or graduate students.
The scholarship grants will be provided for payment of tuition, fees, books,
laboratory supplies, and housing costs of the individual student. W will give
priority to applicants from Y and adjacent Parishes in Z. However, the
scholarship selection committee may consider applicants from other
geographic areas if W's trustees have, in a particular year, allocated more
funds to scholarship than can be prudently awarded to suitable applicants
from the priority areas. The scholarship program requires that the grantee be
enrolled at an accredited educational institution.

The candidates will be selected by a selection committee composed of the
three Trustees of W and no more than two community leaders. The Trustees
shall appoint the additional members of the selection committee from time to
time. In making its selection of a recipient of a scholarship grant, the
Selection Committee shall take into account each applicant’s prior academic
performance, performance on tests designed to measure ability and aptitude,
recommendations from instructors, conclusions from personal interviews, and
references as to the individual’s moral character, ability, and motivation. The

selection committee shall not discriminate in the selection process on the
basis of sex, race, religion, or national origin. The persons who select
recipients of scholarships will not derive a private benefit, directly or indirectly,
if certain potential grantees are selected over others. Awards will not be
made to any person related to the donors, any member of the Selection
Committee, the manager and employees of W, or any other disqualified
person.

Applicants are required to submit an application. Additionally, the applicant
must submit an essay discussing their personal goals, extra-curricular
activities, discipline, grade expectations, and why they should be chosen to
receive a scholarship. The criteria to be used by the Selection Committee are
described as follows:

a. Applicant must possess good character, ambitious purpose, positive
qualities, and should be capable of taking advantage of educational
opportunities to enhance personal excellence.

b. The selection committee will not entertain applications from
employees or relatives of any selection committee member. For this
purpose relatives shall have a definition consistent with the
disqualified person's regulation pertaining to taxable expenditures.

c. The scholarship grants will normally cover tuition, books, fees, and
supplemental living expenses. However, in some cases the Trustees
may limit the grant to tuition, books, and fees.

d. Applicant must provide a copy of their Federal income tax return at
least annually. Dependent student must provide a copy of their
parents’ Federal income tax return at least annually.

In order to renew the scholarship, grantees must complete and submit a re-
application form attached to a copy of their final grade report from the prior
semester and a copy of the most recent Federal income tax return (a copy of
the parent's return is required in the case of a minor).

W shall require a report of the grantee’s courses taken (if any) and grades
received (if any) in each academic period. Such a report must be verified by
the educational institution attended by the grantee. Where study at an
institution does not involve the taking of courses but the preparation of
research papers or projects, W shall require a brief report from the institution
of the progress of the paper or project at least once a year. Such a report
must be approved by the faculty member supervising the grantee or by
another appropriate official of the institution. Upon completion of a grantee’s
study at an educational institution, W shall obtain a final report. Trustees
have the responsibility to follow the progress of the individual grant, that is, to
review each report submitted by the funded educational institution or person,
to make a determination as to whether the grant purposes are being or have
been fulfilled, and to look into any questions requiring further scrutiny or
investigation.

Where a report to W or other information (including failure to submit reports
after a reasonable time has elapsed from their due date) indicate that all or
any part of grant funds are not being used for the purposes of such grant, the
Trustees shall initiate an investigation. While conducting the investigation,

the Trustees shall withhold further payments to the extent possible until is has
determined that no part of the grant has been used for improper purposes,
and until any delinquent reports have been submitted. If the Trustees
determine that any part of the grant has been used for improper purposes, the
Trustees shall take all reasonable and appropriate steps to recover diverted
grant funds or to insure the restoration of diverted fund and the dedication of
other grant funds held by the grantee to the purposes being financed by the
grant. These steps will include legal action unless such action would in all
probability not result in the satisfaction of execution of a judgment. If the
Trustees determine that any part of the grant has been used for improper
purposes, and the grantee has not previously diverted grant funds to any use
not in furtherance of a purpose specified in the grant, the Trustees shall
withhold further payments on the particular grant until (1) it has received the
grantee’s assurances that future diversions will not occur, (2) any delinquent
reports have been submitted, and (3) it has required the grantee to take
extraordinary precaution to prevent future diversions from occurring. If the
Trustees determine that any part of the grant has been used for improper
purposes and the grantee has previously diverted Foundation grant funds, the
Trustees shall withhold further payment until the three conditions of the
preceding sentence are met and the diverted funds are in fact recovered or
restored.

W will retain records that pertain to all grants to individuals for a period of ten
years.

W will send a letter to each recipient setting forth the terms and conditions of
each scholarship grant to an individual. The recipient must communicate an
acceptance by letter to W. Terms and conditions include: specific purpose of
the grant, its duration, the total amount of the grant, and requirements for
reports, including due dates for such reports. Grantees must pursue the
educational objectives for which the scholarship was granted. A renewal of
the grant for any succeeding period is contingent upon evidence of adequate
performance at the time of review.

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
July ,20 , 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 July ,20 , 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, effective

July ,20 , 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.

lf 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