Determination 1315033 approves a private foundation scholarship procedure

Plain-English summary

The IRS approved a private foundation's procedures for awarding scholarships to qualifying students. The proposed program would provide educational grants to indigent individuals, with selection based on financial need and ability to succeed in college. The approval was conditioned on the program operating as described, including direct payment to an educational institution, recordkeeping, and restrictions on grants to disqualified persons. Awards used for qualified tuition and related expenses could qualify as scholarships or fellowships under section 117.

Ruling snapshot

• Question: What did the IRS decide under the facts presented?
• Outcome: Approved, on the stated facts and representations.
• Key authorities: IRC § 4945; IRC § 117; IRC § 170; IRC § 6110.

Full text (IRS public release)

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

Release Number: 201315033
Release Date: 4/12/0213 Employer Identification Number:
Date: January 17, 2013

Contact person - ID number:

Contact telephone number:

LEGEND VIL

x = dollar amount 4945.04-04
Y= name

Dear

You asked for advance approval of your scholarship grant procedures under
Internal Revenue Code section 4945(g). This approval is required because you are
a private foundation that is exempt from federal income tax. You requested
approval of your scholarship program to fund the education of certain qualifying
students.

Our determination

We approved your procedures for awarding scholarships. Based on the information
you submitted, and assuming you will conduct your program as proposed, we
determined that your procedures for awarding scholarships meet the requirements
of Code section 4945(g)(1). As a result, expenditures you make under these
procedures won't be taxable.

Also, awards made under these procedures are scholarship or fellowship grants and are
not taxable to the recipients if they use them for qualified tuition and related expenses
(subject to the limitations provide in Code section 117(b)).

Description of your request

One of your charitable purposes is relief of the poor and distressed and of the
underprivileged. You believe that the best way to accomplish this purpose is to provide
indigent people with core necessities in order to help them become self-sufficient.

The purpose of your program is to implement a program of making educational grants to
indigent persons.

You plan to give one scholarship per year to one exceptionally well-qualified individual.
The scholarship will be awarded annually until the recipient graduates from college, at
which time you will accept application for the next scholarship.

Letter 4792 (10-2012)
Catalog Number 58263T

The individuals eligible to apply for the scholarship include those who are indigent and
cannot afford the cost of obtaining a college education. You have not placed any
restrictions on age, nationality, gender, or other similar restrictions. You will rely primarily
on other charitable organizations, especially charitable organizations that work with the
indigent population, to refer eligible candidates. You do not expect to receive more than
five applications per year; however, you will accept applications from all sources.

You will evaluate applicants based solely on the following criteria:

a. Financial need. Need will be determined based on the applicant’s overall financial
situation. You wish to benefit the truly indigent and expect that the scholarships
will be awarded to recipients with annual gross income of less than x dollars. In
addition you will consider other factors, such as whether the applicant is eligible for
assistance from the referring charity (if any), housing and other governmental
benefits, and other need-based educational scholarships.

b. Ability to succeed in college. Scholarships will be awarded only to individuals who
can demonstrate that they are likely to succeed in a college in the United States.
In making this determination, you will review the applicant’s prior transcripts and
evidence of extracurricular activities.

c. Personal character and motivation. You will evaluate each applicant's character,
motivation, ability, and potential based on a personal interview.

Your selection process will be non-biased. Applicants will be ranked on their financial
need and ability to succeed in college and the scholarship will be awarded to the highest-
ranked applicant that satisfies the eligibility criteria. You will not accept applications from
any person related to you or the Y family.

You will determine whether the potential recipients meet the criteria based on
documentation and other evidence of financial need and ability to succeed in college.
You will examine financial documentation necessary to substantiate that each applicant's
annual gross income is less than x dollars. The selection committee will consist of your
trustees.

You will describe the terms of the grant in a letter to the recipient. The terms and
conditions will include the following:

a. The scholarship will pay for the costs of tuition and related educational expenses
(such as room and board, books and supplies, etc.) in an amount determined
based on financial need.

b. All funds will be paid directly to the educational institution. No portion of the
scholarship grant will be paid to the recipient.

c. The recipient will be required to provide quarterly reports to you, including
transcripts showing courses taken and grades received. In addition, the recipient

Letter 4792 (10-2012)
Catalog Number 58263T

will be required to provide a final report, including a final transcript, upon
completion of the recipient’s study. Finally, the recipient will be informed that you
will have a representative periodically meet with officials of the educational
institution where the recipient is enrolled in order to review and discuss the
recipient’s academic progress and financial needs.

The recipient will be required to accept the terms and conditions before any funds will be
disbursed.

Scholarship grants will be awarded to the recipient on an annual basis until the recipient
completes his or her course of study, but only as long as the recipient remains in good
academic and disciplinary standing.

If the required reports are not provided timely, you will withhold all further payments until
the delinquent reports have been submitted. If you determine that the recipient no longer
meets the terms and conditions of the scholarship, no further scholarships will be
awarded and you will request refunds of any unused scholarship funds from the
educational institution.

You believe that a misuse of the scholarship funds is highly unlikely because the
scholarship will be paid directly to the educational institution; however, if you discover a
misuse of the scholarship funds, you will immediately cease all further grants to the
recipient and will take appropriate action to reclaim any misused funds.

You will maintain all records relating to individual scholarship including information
obtained to evaluate grantees, identify whether a grantee is a disqualified person,
establish the amount and purpose of each scholarship, and establish that you undertook
the supervision and investigation of the scholarship.

Basis for our determination .

The law imposes certain excise taxes on the taxable expenditures of private foundations
(Code section 4945). A taxable expenditure is any amount a private foundation pays as a
grant to an individual for travel, study, or other similar purposes. However, a grant that
meets all of the following requirements of Code section 4945(g) is not a taxable
expenditure.

e The foundation awards the grant on an objective and nondiscriminatory basis.

e The IRS approves in advance the procedure for awarding the grant.

e The grant is a scholarship or fellowship subject to the provisions of Code section
117(a).

e The grant is to be used for study at an educational organization described in Code
section 170(b)(1)(A)(ii).

Other conditions that apply to this determination

Letter 4792 (10-2012)
Catalog Number 58263T

e This determination only covers the grant program described above. This approval
will apply to succeeding grant programs only if their standards and procedures
don't differ significantly from those described in your original request.

e This determination applies only to you. It may not be cited as a precedent.

e You cannot rely on the conclusions in this letter if the facts you provided have
changed substantially. You must report any significant changes to your program to
the Cincinnati Office of Exempt Organizations at:

Internal Revenue Service

Exempt Organizations Determinations
P.O. Box 2508

Cincinnati, OH 45201

e You cannot award grants to your creators, officers, directors, trustees, foundation
managers, or members of selection committees or their relatives.

e All funds distributed to individuals must be made on a charitable basis and further
the purposes of your organization. You cannot award grants for a purpose that is
inconsistent with Code section 170(c)(2)(B).

e You should keep adequate records and case histories so that you can substantiate
your grant distributions with the IRS if necessary.

We've sent a copy of this letter to your representative as indicated in your power of
attorney.

Please keep a copy of this letter in your records.
If you have questions, please contact the person listed at the top of this letter.

Sincerely,

Holly O. Paz
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T