PLR 201113039: IRS approves a private foundation's scholarship program

Plain-English summary

The IRS approved a private foundation's proposed scholarship program for students from a redacted geographic area who planned to attend qualifying educational institutions. The program used need and merit criteria, a selection committee, eligibility restrictions for insiders and their families, and reporting and recordkeeping requirements. The IRS concluded that awards made under the described procedures would not be taxable expenditures under IRC § 4945(d)(3), because the procedures met the advance-approval requirements of § 4945(g). The IRS also stated that qualifying awards could be excluded from recipients' gross income under § 117, subject to that section's limits.

Ruling snapshot

• Question: Do the foundation's proposed scholarship procedures qualify for advance approval under IRC § 4945(g)(1)?
• Outcome: Approved, awards under the described procedures were not taxable expenditures.
• Key authorities: IRC §§ 4945, 117, 170, 4942, 501(c)(3), 509(a); 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: 201113039 Employer Identification Number:
Release Date: 4/1/2011
Date: January 4, 2011 Contact Person - ID Number:

Contact Telephone Number:

UIL: 4945.04-04
LEGEND

B = Scholarship Program Name
C = Geographic Area

D = Non-Profit Organization

E = Church Denomination

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 June 2, 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 are classified as a private foundation as defined in section 509(a).

Your letter indicates that you will operate a scholarship program named B. The purpose of B is to provide scholarships for higher education to students from C, who wish to attend a college or university approved by D. The scholarships are given based on need and merit. The scholarships will go to academically qualified students who are interested in pursuing an academic course leading to service in an agency in which the E is involved. Recipients must attend a school described in IRC sections 509(a)(1) and 170(b)(1)(A)(ii). The application can be obtained from D, which advertises the program via flyers in their bulletins and through their website.

The number of scholarships and amount of each scholarship will be determined each year by the net income of the fund or the amount that must be distributed to enable the fund to satisfy Code section 4942 for minimum distribution requirements.

The applicants must be involved in the church, reside in C, and be interested in pursuing a Christian education. Applicants must complete an application in which they must provide the extra curricular activities they participate in to help others within the community, a family financial statement to determine the financial need of the applicant, a worksheet to be completed by the principal, guidance counselor or faculty member of their high school, and a worksheet to be completed by the pastor, church member, peer group person and business or professional person. The eligible pool of applicants consists of members of the E who live within the bounds of D.

The selection committee consists of the officers and members of D. These members change on an annual basis. Family members of the selection committee are not eligible for the scholarship. The selection committee considers the character and academic achievements of the applicant with the primary consideration being financial need. Recipients of the scholarship cannot be related to any disqualified person.

You will maintain all information and documentation from the scholarship for the applicable statute of limitations. The records will include information obtained to evaluate grantees, identify if the grantee is a disqualified person, establish the amount and purpose of each grant, and establish that you have supervision over, and investigated the scholarships given.

You will pay funds directly to the recipient’s educational institution. You will provide a letter to the educational institution specifying that their acceptance of the scholarship proceeds constitutes their agreement to (i) refund any unearned portion of a scholarship if subsequent to the payment of a scholarship, a scholarship recipient fails to meet any term or condition of the scholarship program; and (ii) notify the trustee if a scholarship recipient fails to meet any term or condition of the scholarship program. You will try to recover the scholarship proceeds from and will halt any further payments to any recipient that fails to meet the terms and conditions of the scholarship 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:

(1) 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
Enclosure: Notice 437