PLR 1250026: IRS approved a private foundation's scholarship grant procedures

Plain-English summary

The IRS approved a private foundation's proposed scholarship program for graduating high school students who plan to attend an accredited four-year college or university in the United States or Canada. The foundation will select recipients using academic, school and community service, awards, recommendations, and essay criteria, with an independent scholarship committee reviewing applications. The IRS determined that the procedures satisfy the objective and nondiscriminatory requirements of IRC section 4945(g)(1), so awards made under the procedures will not be taxable expenditures under section 4945(d)(3), assuming the program operates as proposed. The IRS also determined that the awards are scholarship or fellowship grants under section 117, subject to that section's limitations.

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 §§ 4945(d)(3), 4945(g)(1), 117, 170(b)(1)(A)(ii), 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: 201250026
Release Date: 12/14/2012 Contact Person - ID Number:

Contact Telephone Number:
Date: September 18, 2012

UIL: 4945.04-04

LEGEND

B= Scholarship Program
C= Geographic Area

D= Geographic Area

x= number

y= dollar amount

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,
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 you will operate a grant-making program called B.

The purpose of B is to provide financial assistance to college students who have
demonstrated academic achievement and community service during their high
school years. The number and amount of scholarships will be determined by your
board of directors each year based on your financial condition and your
commitment to other charitable organizations. However, generally you plan to
give x scholarships for y dollars each.

B is open to all legal residents of C and D, who will be or are high school seniors
graduating in the spring of the current calendar year, and plan to, or do enroll in a
full-time undergraduate course of study at an accredited four-year college or
university, in the United States or Canada for the fall term of the next school
year. All candidates will complete an application form and submit an official
current transcript of their grades. Applicants will be judged on the following
criteria:

. Commitment to school and community service activities.

b. The applicant's list of school and leadership awards and honors.

c. Appraisal form completed by a school representative, community advisor,
coordinator, supervisor, or leader.

d. The applicant's short essay on one school or community service
experience, including a description of how the experience benefited
others, and what happened in the applicant's life or the life of the
applicant's family as a result of the activity.

e. Agrade point average at a 2.5/4.0 level or higher.

To ensure all scholarships are awarded on an objective and non-discriminatory
basis, your board of directors has established an independent scholarship
committee which consists of four persons. The scholarship committee is
responsible for the review of scholarship applications and the selection of
scholarship recipients in accordance with guidelines established by your board of
directors.

Award recipients will be notified at the end of August in the same calendar year
that the scholarship was awarded to them, and they must acknowledge that they
will accept the award. In the event the recipient does not graduate from high
school, drops out of high school, or does not enroll in an accredited institution for
study during the current school year, the award will be forfeited and will be
awarded to an alternate recipient.

You will document the selection process and retain all records with respect to the
selection process, including information used to evaluate the qualification of
potential grantees (applications), identification of grantees, the amount and
purpose of each grant, and all grantee reports and follow-up data. Records will
be retained from application to awarding of scholarships, and all the way through
completion of the final year that a grantee receives a scholarship award.

You will write all scholarship checks jointly to both the school and the grantee,
and send the check directly to the school, with instructions that the award must
specifically be used for qualified tuition (in accordance with section 117(a) of the
Internal Revenue Code). Both parties must sign the check, so once the school
receives the check, it keeps the check and contacts the student to come to the
school’s bursar office to co-sign the check. The check will not be directly sent to
the grantee, so he or she cannot use the funds for any other purpose.

The scholarships paid are per annum as long as the grantee remains a full-time
undergraduate student at the same college or university and maintains a
minimum GPA of 2.5. Failure to continue to meet these requirements will result
in an automatic forfeiture of future scholarship grant payments.

Arrangements are made to receive a report of the grantee’s courses taken and
grades received throughout the academic period for which the scholarship is
awarded. It is the grantees responsibility to notify you and provide his or her
grades for the school year that was just concluded. You contact the educational
institution to obtain verification from the educational institution that the grantee
did attend for the full academic year and also obtain verification of the grade
information. This process is performed on at least an annual basis.

Should there be any instances of diverted funds, you will withhold future
payments and make all reasonable efforts to recover the diverted funds.

Relatives of your active alumni members will be eligible to receive scholarships.
However, applications from relatives of alumni will be reviewed by non-alumni
members of the scholarship committee and the same set of criteria must be met
as for all other scholarship applicants.

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. The effective date of our approval is June 16, 2011,
which is the date your request was submitted.

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.

If you have any questions, please contact the person whose name and telephone
number are shown above.

Sincerely yours,

Holly O. Paz
Director, Exempt Organizations
Rulings and Agreements

Enclosure: Notice 437