PLR 201348016: IRS approves a private foundation's scholarship selection procedures

Plain-English summary

A private foundation asked the IRS to approve its procedures for awarding scholarships to students pursuing undergraduate or graduate study in the arts and sciences. The IRS approved the procedures under IRC § 4945(g)(1), so qualifying scholarship expenditures under the approved program will not be taxable expenditures. The program uses academic ability, financial need, and other selection criteria, and requires application review by a scholarship committee. The ruling also explains that scholarships used for qualified tuition and related expenses may be excluded from recipients' income under the limits of IRC § 117(b). The approval does not cover additional support payments that do not qualify as qualified education expenses.

Ruling snapshot

• Question: Do the foundation's proposed scholarship procedures satisfy the requirements for advance approval under IRC § 4945(g)?
• Outcome: approved
• Key authorities: IRC §§ 4945, 4945(g), 4945(g)(1), 117, 117(a), 117(b), 170(b)(1)(A)(ii), and 170(c)(2)(B)

Full text (IRS public release)

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

Number: 201348016 Employer Identification Number:

Release Date: 12/29/2013
Contact person - ID number:

Contact telephone number:

Date: September 5, 2013
UIL: 4945.04-04

LEGEND

X= Name
Y= Country
Z= Nationality

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 your program is to provide scholarships for students who have a high
probability of success to pursue a higher education degree or program in the arts and

sciences. Your program will provide qualified expenses to attend a nationally accredited
college or university in the United States in the arts and sciences to complete an

Letter 4792 (10-2012)
Catalog Number 58263T

undergraduate or graduate degree with a preference for foreign students from Y and of Z
descent with a financial need and/or demonstrated past academic success.

The following is the specific criteria that you will use to determine who is eligible for your
scholarship program:

- A grade point average of 3.5 or approval by the educational institution based
on the student’s success in a particular area of study in the arts or sciences.

- A written essay and/or interview to the Board of Directors satisfaction that the
student has the ability to succeed in the particular area of the arts and sciences
in a nationally accredited educational institution.

- Students must demonstrate a financial need based on income and/or assets.
The Board of Directors may set a maximum income or asset level based on the
current applicable consumer price index for any given scholarship program

- Any additional criteria set forth which shall substantially lead to selecting
candidate students who have demonstrated superior abilities to succeed in the
arts or sciences, and have demonstrated a financial need satisfactory to the
Board of Directors.

At this time, you do not have specific publicity programs. However, you intend to contact
the potential educational institutions that the degree candidates will attend regarding
needs for scholarships, fellowships, and other grants opportunities. You intend to make
available informational materials at these educational institutions to be provided upon
request to eligible candidates.

A completed scholarship package will contain the following:

- An essay and/or personal interview to demonstrate to the scholarship
committee that the candidate student will select an undergraduate major in
science or medical research field, as well as a likelihood for success in the
chosen field.

- An official-sealed high school transcript, to include most recent spring grades.
- A copy of the parent/guardian official verification of income (copy of signed tax
return and W-2 form or equivalent from the previous year).
- A written description demonstrating any special circumstance or special need
applicant would like to be considered in awarding a scholarship.
- Letters of recommendation (optional).

Scholarships are granted annually. Your scholarship committee will only consider
applications received before the deadline. You will follow the following procedure for
granting scholarships:

Letter 4792 (10-2012)
Catalog Number 58263T

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- Upon receipt of a scholarship application, you will review and then forward the
application to your scholarship committee.

- The scholarship committee will review the application and solicit
recommendations when necessary.

- The committee shall make a determination prior to the beginning of the school
year.

- One committee member must sign the original application or facsimile showing
determination.

- The committee will send the original application and required signatures to the
applicant, describing the committee determination, and informing the applicant
of any action recommended or required.

- The Committee will evaluate each application on an individual basis to
determine financial need. Student qualifications will be considered after
financial need is determined.

The scholarship amounts will depend on the costs to attend the particular college or
university. Any such scholarship would be related to the intended goal of the grant,
would be a reasonable amount and used for qualified educational expenses such as
tuition and fees and course related expenses such as books, supplies and related
equipment. To the extent necessary to enable a student to complete their degree, you
may provide additional support which does not meet the definition of “qualified education
expenses” which are not subject to exclusion from the recipient's income under Internal
Revenue Code Section 117. This ruling does not include an approval of such additional
support payments.

Scholarship amounts will be dependent on the costs to attend the college or university.
The number of scholarships you will grant is estimated to be between 0 and 5 depending
on the pool of qualified applicants. You will coordinate with the college or university to
determine the pool of qualified candidates. Once the pool of candidates is determined
the committee will review the applications to determine who will receive the scholarships.
You will determine how many scholarships to award annually by reviewing your overall
award of funds to organizations and other qualified educational programs, as well as
available funds at the end of your calendar year, and determine the appropriate number
of scholarships, fellowships, and grants prior to distributing applications for the applicable
year.

Additional financial support may be awarded on a case by case as determined by the
Scholarship Committee. The amount of additional support will be reviewed on an annual
basis prior to the beginning of the school year by the Scholarship Committee. The
Scholarship Committee will review information to determine financial need and whether
the additional financial support is reasonable and necessary to enable the student to
complete the degree at the college or university. Examples of situations where additional
amounts may be awarded include the following:

- Costs for health insurance if the college or university requires the student to have
such insurance.

Letter 4792 (10-2012)
Catalog Number 58263T

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- Costs for room and board if the applicant can show this would impose a financial
burden that would prevent them from attending the educational institution.

- Other educational expenses necessary to enable the student to complete the
degree at the college or university.

You will require scholarship grant recipients to provide transcripts of his or her grades for
each term and maintenance of a certain predetermined grade point average and proof of
use of scholarship funds either through verifications from the educational institutions or
other means acceptable to the trustees. If the terms for continued scholarship eligibility
are violated, you will notify the student by letter within thirty days of discovering violation
of the terms of the award. The student will be permitted one appeal by submitting a
written essay which explains the circumstances which led to the violation, any corrective
action taken and assurance that future violations will not happen. Your Board of
Directors will review the written essay and make a determination of the student’s
continued scholarship eligibility.

You will maintain records showing recipients of your scholarships, fellowships,
educational loans, or other educational grants, including information used to evaluate
potential grantees, names, addresses, purposes of awards, amount of each grant,
manner of selection, and relationship (if any) to officers, trustees, or donors of funds to
you and all grantee reports and other follow-up data obtained in administering the private
foundation’s grant program

You will ensure grant funds held by a grantee are used for their intended purposes, and
withhold further payments to grantees until you obtain grantees’ assurances that future
diversions will not occur and that grantees will take extraordinary precautions to prevent
future diversions from occurring.

Relatives of members of your selection committee, or your officers, directors, or
substantial contributors are not eligible for awards under your 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
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
170(b) (1) (A) (ii).

Letter 4792 (10-2012)
Catalog Number 58263T

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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

- 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,

Kenneth Corbin
Acting Director, Exempt Organizations

Enclosures:
Notice 437
A copy of the redacted letter

Letter 4792 (10-2012)
Catalog Number 58263T

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