IRS approves private foundation scholarship procedures

Plain-English summary

The IRS approved a private foundation’s procedures for scholarships supporting youth and young adults in undergraduate or graduate education. The program is intended for applicants who demonstrate financial need and the potential to complete a course of study. Applicants must meet requirements including high school graduation, a minimum 3.0 GPA, an essay, financial-need evidence, a recommendation, and maintenance of at least a 2.5 GPA during the scholarship term. The foundation may offer twelve scholarships each year, reviews recipients annually, monitors academic progress, and generally pays educational institutions directly. Awards used for qualified tuition and related expenses are not taxable to recipients, subject to the limitations described in IRC § 117(b).

Ruling snapshot

• Question: Whether the foundation’s proposed scholarship procedures qualify for advance approval under IRC § 4945(g)(1).
• Outcome: Approved.
• Key authorities: IRC §§ 4945(g)(1), 117(a), 117(b), and 170(b)(1)(A)(ii).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45202

Number: 201316022 Employer Identification Number:

Release Date: 4/19/2013
Contact person - ID number:

Date: January 25, 2013 Contact telephone number:

LEGEND: UIL: 4945.04-04
X= scholarship program

u = dollar amount
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

Your letter indicates you will operate a scholarship program called X. The purpose of X is
to provide grants for youth and young adults to reach their full potential through a college
undergraduate and/graduate program. The objective is to help, through financial aid, on a
nondiscriminatory basis, any person who can establish a need and who evidences the
potential ability to fully complete a course of study.

Scholarships are awarded based on need and the anticipated education costs. While there
is no set amount awards are not expected to exceed u dollars. You plan on offering twelve
scholarships annually. Each grant is tailored to the applicant after a full review of the
application by the entire Board of Directors. Applicants must meet the following
requirements:

• Graduation from high school;

Letter 4792 (10-2012)
Catalog Number 58263T

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• Minimum high school GPA of 3.0 and potential for college success
demonstrated by high school course work that exceeds the state minimum
mandated requirements;

• Financial need established by a parents’ tax return, a Student Aid Report, or
other supporting type of evidence;

• Each applicant must provide an essay that describes in detail the student’s plan
for further education, the family’s financial ability to pay, and something about the
student’s motivation to succeed;

• Maintenance of a minimum GPA of 2.5 for each year of the scholarship term;
• A third-party recommendation that describes character and potential for
success.

You stated that you will not discriminate on the basis of race, religion, sex, age or sexual
preference when evaluating applications for scholarship grants. At least annually, the full
Board of Directors will review whether the student has properly met the terms of the
scholarship grant before any new funds will be committed.

Under your program, award amounts will be determined by your Board of Directors.
Scholarships are intended for those with significant need and the ability to succeed in a
college environment. You inform selected high schools that you have scholarship funds
available and provide an application form for any interested students. Recipients are
required to submit an annual report of their progress to you at the end of each school term.
You monitor the use of scholarship funds by requiring each recipient to provide an official
copy of their student report (transcript) showing courses taken and grades received (if
any). Recipients 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.

Each scholarship under your program will be subject to your annual review and approval of
the recipients’ academic record and other relevant information. Under your procedures,
the scholarship recipients from prior years are eligible to have their scholarships renewed
annually, but each recipient will be required to maintain the same performance standards
as are first-time applicants.

Your Board of Directors makes selections of your scholarship recipients. Your Board of
Directors has six (6) members who are disinterested persons. Any relatives or family
members of the Board of Directors are not eligible to apply for your scholarship grants.
Applicants must apply directly to you. The only limitation is the amount of scholarship
funds that you may have available; otherwise, there is currently no limit on the number of
individuals that are eligible to apply for the scholarship.

Additionally, you signed a written statement to acknowledge and agree 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 the your scholarship grant-making program.

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

Letter 4792 (10-2012)
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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.

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

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

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

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

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.

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

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

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

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).

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

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