PLR 1052018: IRS approved Catholic school scholarships and educational loans

Plain-English summary

The IRS approved a private foundation's scholarship and educational loan programs for students attending or seeking to attend Catholic elementary and high schools in a redacted location. The programs use financial need and academic merit, independent school recommendations, school records, and follow-up reporting to select and monitor recipients. Scholarships and loans must be used for the stated educational purposes, and the program excludes family members of trustees and other disqualified persons. The approval was conditioned on the programs continuing to operate materially as described and meeting the requirements of IRC § 4945.

Ruling snapshot

• Question: Did the foundation's scholarship and educational loan procedures satisfy the advance-approval requirements for grants to individuals?
• Outcome: Approved
• Key authorities: IRC §§ 74, 117, 170, and 4945; Rev. Rul. 77-434

Full text (IRS public release)

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

Number: 201052018
Release Date: 12/30/2010

Employer Identification Number:
Date: October 8, 2010

Contact Person - ID Number:

Contact Telephone Number:

LEGEND UIL 4945.04-04

Dear

We have considered your request for advance approval of your grant-making programs
under section 4945(g)(1) of the Internal Revenue Code, dated December 7, 2009 and
received December 21, 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 were classified as a private foundation as
defined in section 509(a).

You indicated that you will operate a grant-making program called Y.

The purpose of the scholarship is to provide scholarships to certain qualified students
who attend or desire to attend Catholic elementary schools and Catholic high schools in
Z, but who need financial assistance in order to do so. The parents of the elementary
school and high school students must complete a SMART application form, which helps
calculate a student’s financial need.

Each year, the trustee advises the scholarship advisory committee as to the amount available
for scholarships. The scholarship advisory committee, whose members are selected by the
trustee and serve at the discretion of the trustee, then reviews the recommendations of the
principals and recommends to the trustee those students who should receive the scholarship
awards. Each year, the principals of the Catholic elementary and secondary schools in and
around Z recommend to the scholarship advisory committee which students should receive the
scholarship awards. The scholarship advisory committee also determines the number of
scholarships that shall be awarded and the amount of each scholarship. The scholarship
advisory committee makes its recommendations based on the recommendations of the
principals and the factors set forth by the scholarship program’s application and summary
report. The summary report is generated by a software program that considers the financial
need and grade point average of each student. The program ranks the students as a result of

Name:
EIN:

this financial and academic information. The scholarship program’s application and summary
report help the scholarship advisory committee rank the applicants based on academic merit
and financial need. The trustee then selects the scholarship recipients

A significant number of scholarships are awarded each year to students selected from a large

pool of eligible candidates. For example: it is anticipated that scholarships will be

awarded in ; scholarships will be awarded in and scholarships will be

awarded in . There are approximately students eligible to apply for scholarships in
, students eligible to apply in and students eligible to apply in

There were applicants in , and it is anticipated that there will be applicants

in and applicants in

The scholarship program is advertised and promoted by local churches. Articles about the
scholarship program have appeared in B. In addition, individual parishes have included
scholarship information in their Sunday bulletins. Furthermore, the principals of the schools
notify families of the availability of the scholarships.

All scholarships are awarded on an objective and non-discriminatory basis. No scholarships
may be awarded to any individual who is related by blood, adoption, or marriage to any
member of the scholarship advisory committee or any disqualified persons of X.

At the end of each school’s marking period, the principals of each school receive a report
of the grades and status of the students receiving scholarships. They notify the
scholarship advisory committee and the trustee if any students are not satisfying the
scholarship guidelines.

If the reports submitted to the committee and trustee indicate that all or a portion of the
grant is not being used as designated, the committee will investigate and withhold future
payments until the delinquent reports have been submitted. The student receiving the
scholarship and his/her family will be contacted concerning the student’s failure to meet
the requirements of the scholarship program. If the requirements of the scholarship
program cannot be met, the student’s family will be advised of the discontinuation of the
award.

The trustee pays the scholarship award directly to the elementary school or high school
attended by the recipient attends for the recipient’s benefit. The trustee provides a letter
to each educational institution specifying that the educational institution’s acceptance of
the scholarship proceeds constitutes the educational institution’s agreement to refund any
unearned portion of a scholarship if, subsequent to payment of a scholarship, a
scholarship recipient fails to meet any terms or conditions of the scholarship program,
and, to notify the trustee if a scholarship recipient fails to meet any terms or conditions of
the scholarship program.

The trustee agrees to maintain records relating to: Information used to evaluate the
qualification of potential grantees; Identification of the grantees (including any
relationship of any grantee to the Trust); the amount and purpose of each grant; and all
grantee reports and other follow-up data obtained in administering the Trust’s grant
program.

Name:
EIN:

Each year, if a student wants to renew a scholarship, the student’s parents must follow h
the same procedures of completing the application form and providing the
_ required information.

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.

Revenue Ruling 77-434, 1977-434, 1977-2 C.B. 420, provides that long-term, low interest
loans by private foundations for educational purposes may be considered grants within
the meaning of section 4945(g)(3) of the Code.

Based on the information submitted and assuming your scholarship and loan programs
will be conducted as proposed with objectivity and nondiscrimination in awarding grants,
we determined that your procedures in awarding scholarship grants and educational loans
comply with the requirements of section 4945(g)(1) and 4945(g)(3) of the Code and that
scholarships and loans granted according to these procedures will not be “taxable
expenditures” within the meaning of section 4945(d)(3).

Name:
EIN:

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 or loans 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 grant-making procedures is a one-time approval of your system
standards and procedures that will result in grants and loans which meet the requirements
of section 4945(g)(1) and 4945(g)(3) of the Code. This determination only covers the
grant programs described above. Thus, approval shall apply to succeeding grant and loan
programs only as long as the standards and procedures under which they are conducted
do not differ materially from those described in your request.

We have not considered whether grants made under your procedures are excludable from
the gross income of recipients under section 117(a) of the Code.

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 grant 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