IRS approves a private foundation's four scholarship programs

Plain-English summary

The IRS approved a private foundation's procedures for four scholarship programs. The programs serve students seeking degrees or diploma programs, including single parents, non-traditional adult students, and students affected by natural or man-made disasters. The foundation must use objective and nondiscriminatory selection procedures, verify enrollment and academic progress, restrict awards to eligible recipients, and maintain records. The IRS concluded that awards made under the approved procedures would not be taxable expenditures under section 4945(d)(3), and that qualifying scholarship or fellowship grants may be excludable from recipients' gross income under section 117.

Ruling snapshot

• Question: Did the foundation's proposed scholarship procedures qualify for advance approval under IRC section 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 74, 117, 170, 4945, 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

Number: 201236031 Employer Identification Number:

Release Date: 9/7/2012
Contact Person - ID Number:

Date: June 12, 2012
Contact Telephone Number:

UIL: 4945.04-04
LEGEND
W= Program Name
X = Program Name

Y = Program Name
Z = Program Name

B= Names

t= Specific grade point average
u= Quantity

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 January 9, 2012.

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).

You indicated that you will operate grant-making programs called W, X, Y, and Z.

The purpose of W is to provide scholarships to students who would otherwise find it
difficult to meet the expenses associated with obtaining a GED, an undergraduate degree,
graduate degree or pursuing a diploma program.

The purpose of X is to provide scholarships to college students who are single parents, in
financial need, and are pursuing a bachelor’s degree, an associate’s degree, diploma
program or graduate degree. The intention of this award is to assist single parents who do
not have the support of a domestic partner.

The purpose of Y is to provide scholarships to non-traditional adult students, in financial
need, returning to full-time post-secondary education.

The purpose of Z is to provide scholarships to college students in financial need, who are
pursuing a bachelor’s or associate’s degree, diploma program or graduate degree and
have survived a natural disaster (such as flood, hurricane or tornado) or significant man-
made disaster(such as massive oil spill or terrorist attack).

Your programs will primarily focus on individuals in the states of B but you will accept
applications from all over. Your programs will be listed in registries, which publish
scholarship entity information in the public domains. Potential applicants will email you
to receive additional information and an application to apply for your scholarships.

The number and amount of scholarships you will award are based on the number of
applicants, the need of the applicants, and funding available. The scholarship amounts
may be adjusted accordingly.

The criteria to determine eligibility for the each program are as follows:

• To qualify for W, the applicant must have a GPA of at least t, must not have
any felony convictions or have satisfied the terms of such a conviction by mid
summer of the application year. The applicant must also demonstrate
financial need, concern for others, motivation for personal success through
paid work experience, ability to succeed in college and the ability to clearly
communicate personal strengths.

• To qualify for X, the applicant must be a single parent with custody of a
dependent child/children (under the age of 18), and be “head of household” as
defined by the IRS regulations. The applicant must also have a high school
diploma or GED, or be about to complete high school or receive a GED, or be
a continuing college student. The applicant must be seeking a bachelor’s
degree, an associate’s degree or pursuing a diploma program. As in the
previous program, the applicant must not have any felony convictions or have
satisfied the terms of such a conviction by mid summer of the application
year. The applicant must also demonstrate concern for others, personal
motivation to succeed, leadership ability, and clear communication skills.

• To qualify for Y, the applicant must be at least u years of age, seeking a
certificate, an associate’s degree, bachelor’s degree, or graduate degree or
pursuing a diploma program and attending school attend full-time on campus.
As in the previous programs, the applicant must not have any felony
convictions or have satisfied the terms of such a conviction by mid summer of
the application year; the applicant must demonstrate concern for others,
personal motivation to succeed, leadership ability, and clear communication
skills.

• To qualify for Z, the applicant must show he/she has survived a natural
disaster or man-made disaster within a year from the application date. The
applicant must be either a high school graduate (or equivalent), enrolled in a
two or four year degree program at a college or university, or a student
planning to enroll in a technical college or graduate school. Moreover, the
applicant must have a GPA of at least t. As in the previous programs, the
applicant
must not have any felony convictions or have satisfied the terms of such a
conviction by mid summer of the application year; the applicant must
demonstrate concern for others, personal motivation to succeed, leadership
ability, and clear communication skills.

For all four programs, applicants must submit a scholarship application form and provide
supporting documentation. In addition, the applicant must detail his/her financial need
and describe his/her career plans in a statement not to exceed two pages, provide
transcripts, and provide letters of reference. The board of directors will set application
date deadlines. Applications with missing parts will not be considered but the board of
directors may make exceptions to or extensions for the deadlines upon showing of
extenuating circumstances.

Your selection committee is comprised of your Board of Directors. As part of the
selection process, relatives of the Board of Directors and the selection committee are not
eligible for scholarships. In addition, disqualified persons and relatives of disqualified
persons are not eligible.

For W, X, and Z, the selection committee will choose recipients who demonstrate:

• Concern for others and has contributed time and energy to volunteer projects and/
or service organizations.

• Motivation and desire to contribute to personal success through paid work
experience.

• Leadership ability through participation in school and community activities

• An ability to succeed in college.

• An ability to communicate personal strengths.

For Y, the selection committee will select recipients who demonstrate:

• A history of working responsibly on the job or in the home by helping to raise a
family.

• A commitment to education as a way for improving their lives and the lives of
their families and their communities.

• Involvement in the community through volunteer service to others.

• Active participation and/or leadership in family, school or community activities.

• An ability to clearly communicate personal strengths and goals.

• An ability to benefit from college.

Scholarship recipients must provide evidence of acceptance and/or registration in an
acceptable education program and are required to sign an affidavit that scholarship funds
will be used in accordance with the scholarship program requirements; the funds then are
provided directly to the recipient. Moreover, scholarships are awarded each academic
period and may be renewed annually, provided that the student is not on academic or
disciplinary probation and is making satisfactory progress towards completion of the
degree or program. Additionally, the student must maintain t as a GPA.

You will obtain and verify progress reports with the educational institution each
academic period. Additionally, upon completion of the recipient’s chosen degree or
program, you will collect a final progress report from the recipient.

When a progress report is not filed by the student, or where there may be indication that
funds were not used for the intended purposes, you will investigate and take reasonable
steps to recover misused funds until you have determined that the funds have been used
for their intended exempt purpose. Moreover, you will withhold further payments from
the educational institution on behalf of the recipient.

You will retain all records submitted by the students and their education institutions,
including original applications, semester reports (and/or applicable periodic academic
reports), and progress reports. You will maintain records of all scholarships awarded and
related payment schedules for each scholarship recipient. You will obtain and maintain
evidence that no recipient is related to you, or to members of your Board of Directors, of
disqualified individuals or any member of the selection committee.

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).

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