IRS approves a modified scholarship grant program

Plain-English summary

The IRS approved a private foundation’s modified scholarship grant-making program under section 4945(g)(1). The changes added extracurricular-activity achievement grants to existing leadership, financial-need, and academic-achievement grants. The IRS accepted the program because awards would use an objective and nondiscriminatory selection process and would be made for qualifying study at educational institutions. The approval was limited to the procedures described and conditioned on no material change in the facts.

Ruling snapshot

• Question: Did the foundation’s modified scholarship procedures satisfy the advance-approval requirements of section 4945(g)?
• Outcome: Approved
• Key authorities: IRC §§ 74, 117, 170, 4945, 501(c)(3), 509(a), and 6110; Treas. Reg. § 53.4945-4

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Number: 201252019 Employer Identification Number:

Release Date: 12/28/2012
Contact Person - ID Number:

Date: October 5, 2012 Contact Telephone Number:
LEGEND UIL: 4945.04-04

T= State

V = County

Y = High School

Z = City

b dollars = dollar amount
Dear

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

Purpose

Your purpose is to hold and administer certain funds to provide scholarship grants to individuals
for study at educational institutions. Your scholarship policies and procedures have been
prepared to ensure that the scholarship grants meet the requirements of paragraph (1) of section
4945(g) of the Internal Revenue Code (“Code”) and section 53.4945-4 of the Treasury
Regulations and are awarded on an objective and nondiscriminatory basis.

Compliance with Code Section 4945(g)

All scholarship grants shall meet the requirements of paragraph (1) of section 4945(g) of the
Code.

Paragraph (1) of Code section 4945(g) permits grants that are scholarships or fellowships, which
are excluded from gross income under Code section 117(a) and are to be used to study at an
educational institution described in former Code section 151(e)(4). A scholarship or fellowship
grant is defined as a grant to a degree candidate for tuition, fees, and other expenses. These
grants are to be used for study at an educational institution that maintains a regular faculty and
curriculum and has an organized body of students in attendance at the place where the
educational activities are held. You intend to make the scholarship grants qualifying under
paragraph (1) of Code section 4945(g) in the form of scholarships for students attending
qualified colleges and universities.

All scholarship grants shall be awarded using an objective and nondiscriminatory selection
process approved by you in advance of making awards.

You have described changes in your previously approved scholarship grant program. You
further acknowledge that you may in the future create new categories of educational grants with
different requirements than those previously described. However, all such new categories of
educational grants will be subject to all other relevant requirements of existing program policies
and procedures. Such changes would not be regarded as material modifications to your
previously approved scholarship grant program and would not require individual approval prior
to implementation.

You are incorporating the following changes into your previously approved scholarship grant
program.

1. With respect to the number of scholarships and amounts, you include the provision that
   your board of directors may decide not to award any scholarship grants in any particular
   year. It will be your sole discretion as to which type and number of these educational
   grants you will make available in any given year, and you reserve the right to not offer or
   cease offering a particular type of educational grant in any given year.

2. With respect to selection criteria, you add a 4th type of educational grant, Extracurricular
   activity achievement grants, to the current 3 types of educational grants you will make,
   (Leadership/classroom citizenship awards, Financial need-based grants, Academic
   achievement grants).

Extracurricular activity achievement grants — Extracurricular activity achievement grants
will be made in the form of scholarships for students attending undergraduate and
graduate programs at qualified colleges and universities. Extracurricular activity grants
will be awarded based on the student’s participation in high school in any extracurricular
program including, but no limited to sports, the arts, forensics, mock trial, student
government, academic related, service related, or school spirit related clubs and
demonstrated leadership, good character, and good behavior of the student. All
Applicants for extracurricular activity grants must possess a cumulative grade point
average of at least 2.5 or demonstrated academic achievement through performance on a
standardized test in the fiftieth percentile. Applicants are required to summarize
instances of demonstrated leadership and discuss their participation in the particular
extracurricular activity as part of their written discussion of the reasons for applying for
the scholarship grant.

You reserve the right to limit eligibility for an extracurricular activity achievement grant
to persons who participate in a single activity or certain activities, e.g., basketball,
marching band, etc., determined by you. Should you limit eligibility in such a fashion,
you will make the extracurricular activity achievement grants(s) available to students
from more than one school. You will ensure that the schools selected have, in the
aggregate, students participating in the selected activity numbering 750. If you do not
wish to engage in the process of indentifying schools with students participating in the
selected activity in the required numbers, then you may instead make such an
extracurricular activity achievement grant that is limited to a certain activity open to all
schools located in the counties adjacent to V. Additionally, you reserve the right to make
such an extra curricular activity achievement grant open to all schools located in T or
any other state of the United States.

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,

Holly O. Paz
Director, Exempt Organizations
Rulings and Agreements

Enclosed:
Notice 437
Redacted copy of Letter