PLR 201136026: IRS approves a private foundation scholarship program

Plain-English summary

The IRS approved a private foundation’s scholarship procedures for students who attend or want to attend a specified university and demonstrate financial need. The scholarship program uses a selection committee, excludes certain related applicants and committee members from benefiting, and requires awards to be made objectively and without discrimination. The foundation pays the scholarships directly to the university, which must refund unearned amounts and report failures to meet the program’s conditions. The IRS determined that awards made under the approved procedures would not be taxable expenditures under section 4945(d)(3) and would be excludable from recipients’ gross income subject to section 117.

Ruling snapshot

• Question: Whether the private foundation’s scholarship procedures qualify for advance approval under IRC § 4945(g)(1).
• Outcome: Approved.
• Key authorities: IRC §§ 74(b), 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 4942, 4945(d)(3), 4945(g), 501(c)(3), 509(a), 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

Date: June 13, 2011 Employer Identification Number:

Number: 201136026 Contact Person - ID Number:
Release Date: 9/9/2011

Contact Telephone Number:
UIL: 4945.04-04

LEGEND

X= University Name
Y= The Scholarship Program

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 16, 2010.

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 grant-making program called Y.

Y’s purpose is to provide scholarships to certain academically qualified students who are in need of financial assistance and who attend or desire to attend X. The applicants must meet the following criteria: (a) be a student of X; (b) demonstrate financial need: (c) provide financial information to X.

Y is not advertised. Once accepted at X, the student is advised that there are scholarship funds available to assist in paying their tuition. The scholarship is renewable but prior recipients are required to re-apply each year.

The selection committee is composed of: (1) the trustees of X and (2) your individual trustee. The selection committee reviews the qualifications of the applicants and then selects the recipients. The scholarships may not be awarded to any individual who is related by blood, adoption, or marriage to any member of the selection committee or any disqualified person of the trust as a first cousin or closer relative. A selection committee member may not benefit, directly or indirectly, from selecting certain scholarship recipients over other potential scholarship recipients. All scholarships are awarded on an objective and non-discriminatory basis.

The amount and number of the grants varies dependent upon the required amount, as defined as the net income of the trust, to distribute for that year and the number of

qualified applicants. The required amount is defined as the net income of the trust or if greater the amount that must be distributed to enable the trust to satisfy code section 4942 “minimum distribution” requirements (after taking into account administrative expenses and qualifying distribution carry forwards). Each year, the trustee advises the selection committee as to the amount available for scholarships.

The scholarships are paid directly to X. The trustee provides a letter to X specifying that X’s acceptance of the scholarship proceeds constitutes X’s 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 Y; and (ii) notify the trustee if a scholarship recipient fails to meet any term or condition of Y.

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(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,

Lois Lerner
Director, Exempt Organizations