PLR 1224038: IRS approves a private foundation's scholarship grant procedures

Plain-English summary

The IRS approved a private foundation's proposed scholarship program for people employed in the produce industry and their immediate relatives. The foundation planned to select students based on academic records, an ethics essay, financial need, and recommendations from an independent advisory board, while excluding its own employees and related persons. It would require applications, academic records, progress reports, and final reports, and would investigate and recover funds if scholarships were misused. The IRS concluded that awards made under the proposed procedures would not be taxable expenditures under IRC § 4945(d)(3) and would qualify as scholarship or fellowship grants under § 117, subject to that section's limits.

Ruling snapshot

• Question: Could the private foundation receive advance approval for its proposed scholarship procedures under IRC § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 4945(a), (b), (d)(3), and (g); IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 501(c)(3), 509(a), and 6110; 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

Employer Identification Number:
Number: 201224038
Release Date: 6/15/2012
Contact Person - ID Number:

Contact Telephone:
Date: March 20, 2012

LEGEND UIL: 4945.04-04

N = Trade Organization
P = Trade Organization
E = Trade Organization

x = number
u = $amount

Dear [illegible]:

We have considered your request for advance approval of your grant-making program under
section 4945(g)(1) of the Internal Revenue Code, dated August 16, 2011.

Our records indicate that you are 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 grant-making program.

Your purposes are to award academic scholarships to provide financial assistance to individuals
who are employed in the produce industry and their family members in furthering their
education, to meet the expenses of tuition associated with obtaining degrees at educational
institutions. Additionally, you seek to promote the topic of ethics in the produce industry in order
to encourage individuals and businesses to consider the importance of doing the right thing in the
course of their professional dealings.

To be eligible, grantees of your scholarship program must be attending or must have been
accepted by and plan to attend an educational institution in order to obtain an undergraduate,
graduate or post-graduate degree, and must be currently employed in the produce industry or be
an immediate relative (son, daughter, father, mother, sister, brother, or grandchild) of someone
currently employed in the produce industry. There is currently no limit on the number of
individuals that are eligible to apply for the scholarship.

Under the scholarship program you will offer at least x scholarships each year in the amount of
$u per school year, renewable on an annual basis. Each scholarship under your scholarship

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program will be subject to your annual review and approval of the recipients’ academic record
and other relevant information. Under your Scholarship Renewal Procedures, the scholarship
recipients from prior years are eligible to have their scholarships renewed annually, but each
recipient is required to re-submit an application to you each year and will therefore be subject to
the same application procedures as are first-time applicants.

Final selection of scholarship recipients will be made by your Trustees after the field of
applicants has been narrowed to approximately 5 to 8 candidates through the evaluation and vote
of your Scholarship Advisory Board. Finalists for scholarship awards will be determined by the
Advisory Board whose members are appointed by the Trustees. The Advisory Board is made up
of several (currently 9) individuals who are disinterested persons who represent a diverse pool of
experience in business, education and community involvement. Your employees and the
employees, officers and board members of any trade organizations that are involved in the
nomination process are ineligible to serve on the Advisory Board. At no time will any relatives
or family members of your Trustees and/or Advisory Board members be eligible to apply for the
scholarship.

The scholarship program will be publicized at trade shows, in trade publications and through
your website, in cooperation with several 501(c)(6) trade organizations, who will notify their
members (via their websites and other methods of their choice) as to the availability of
scholarships, and annual renewal opportunities for existing scholarships. Applicants must apply
directly to you. In addition, each of the several section 501(c)(6) trade organizations, including
N, P and E, will nominate at least three (3) applicants from a group which includes their
members and the children, grandchildren, brothers, sisters, nieces and nephews of their members.

All applicants are required to submit to you a complete academic record and an essay on ethics
of at least 500 to 1,000 words. The essay will stress the importance of ethics and must detail an
example of a situation in which the applicant was confronted with an ethical dilemma and did the
right thing in spite of the cost. Applicants are expected to have grade point averages (in their
most recent year of study) of at least 3.0 to be considered. The decision-making process for your
scholarship award is weighted heavily in favor of applicants who display a strong understanding
of the importance of ethics. Applicants must demonstrate academic achievement. The recipients
will be expected to maintain a minimum of 3.0 GPA throughout their scholarship year and to
make written reports of their progress to you at the end of each school term. You will monitor
the use of the scholarship funds by requiring each recipient to provide an official copy of the
student’s transcript showing courses taken and grades received (if any). Where study at an
institution does not involve attendance of class in specific courses but requires the preparation of
research papers or projects, you require a brief report from the institution on 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 official of the institution. Upon completion of a grantee’s
study at an educational institution, a final report is also to be obtained. The scholarship
recipients/grantees are expected to pursue a degree at an educational institution. In each case it
is stipulated that a renewal of the scholarship funds for any succeeding period is contingent upon
evidence of adequate performance at the time of review. Whenever possible the scholarship
funds will be paid directly to an educational institution for the benefit of the recipient.

If there is any indication that any part of a scholarship grant has not been used in accordance
with the purposes of the scholarship program, you will initiate an investigation. While
conducting the investigation, you will withhold further payments to the extent possible until it
has been determined that no part of the scholarship fund has been used for improper purposes
and until any delinquent reports have been submitted. If you determine that any part of the
scholarship fund has been used for improper purposes, you will take all reasonable and

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appropriate steps to recover diverted funds or to insure the restoration of diverted funds. The
steps you take will include legal action unless such action in all probability would not result in
the satisfaction of execution of a judgment.

Additionally, you have agreed to continue to maintain records that include: (1)Information used
to evaluate the qualifications of potential grantees; (2)Identification of the grantees (including
any relationship of any grantee to you), the amount and purpose of each grant; and (3)All grantee
reports and other follow-up data obtained in administering your scholarship grant-making
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) (as in effect on the day before the date of the enactment of the Tax
Reform Act of 1986) 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 providing 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).

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In addition, we have determined that awards made under your procedures are ‘scholarship or
fellowship’ grants within the meaning of section 117 of the Code, and are excludable from the
gross income of the recipients subject to the limitations provided in section 117(b) of the Code,
including to the extent that such grants are used for qualified tuition and related expenses within
the meaning of section 117(b)(2) 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,

Lois G. Lerner
Director, Exempt Organizations

Enclosure: Notice 437
A redacted copy of this letter