Service-learning scholarship procedures received advance approval

Plain-English summary

A private foundation proposed up to two annual scholarships for full-time college students in a specified department who participated in service-learning, cooperative education, or internships. The college applied objective eligibility rules and selected recipients, while the foundation's committee verified compliance and obtained final board approval. Insiders and their relatives were ineligible, payments went directly to the college, and unused funds would be returned if a recipient did not return the next academic year. The IRS approved the procedures under § 4945(g)(1), superseding an earlier letter. Qualifying expenditures would not be taxable to the foundation, and awards used for qualified tuition and related expenses would be nontaxable to recipients within § 117(b)'s limits.

Ruling snapshot

• Question: Did the foundation's college service-learning scholarship procedures satisfy the advance-approval rules for grants to individuals?
• Outcome: Approved. Grants made under the approved procedures were not taxable expenditures.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1)

Full text (IRS public release)

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

Number: 201432023
Release Date: 8/8/2014

Employer Identification Number:

Contact person - ID number:

Contact telephone number:

Date: May 14, 2014

LEGEND:

B = college
C = city/state
e = dollar amount
X = foundation
Y = alternate foundation name
Z = college department

UIL:
4945.04-04

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.

This letter supersedes our letter issued to you on February 10, 2014.

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

The X, doing business as Y, awards scholarships to students majoring in a program in
the Z at B located in C and who are enrolled in or completed a course with a service-
learning, co-op, or internship component. You will award up to two scholarships in the

Letter 4792 (10-2012)
Catalog Number 58263T

2

amount of $e dollars annually to be applied to each recipient’s tuition, fees, or other
related college expenses in the following academic year.

The Z at B publicizes the availability of the scholarships and eligible students will submit
an application and other required documentation to Z. To be eligible for a scholarship, an
applicant must be enrolled full time (minimum of 12 credits) at B and majoring in a
program in Z, have completed at least 12 credits at B, have at least a 2.0 grade point
average, return to B after the award is made, and be enrolled in or completed a course
with a service learning, co-op, or internship component during the academic year in
which the application for the scholarship is made. Applicants must submit a one-page
typed essay on the topic of service learning and/or community service and submit one
letter of recommendation from the site which hosted their service learning, co-op, or
internship or from a faculty member.

Preference is given to students who plan to enter a career in the broad field of social
services, and applicants are asked to elaborate on their plans for such a career.
Recipients are selected by the Z at B based on the above criteria and in accordance with
policies and procedures established by B regarding the selection of all scholarship
recipients. B policies require that recipients be selected on a nondiscriminatory basis.

B notifies Y regarding the students selected to receive the scholarships and provides Y
with information regarding each recipient. This information is reviewed by your Program
Development and Education Committee to confirm that each student selected by B to
receive a scholarship satisfies your criteria for the scholarship. You are invited to attend
B’s Honors Convocation held in May of each year to present the scholarships to the
recipients. The actual funds for the scholarship are paid by you directly to B and credited
to the student's account for use towards tuition, fees, and related educational expenses
in the academic year immediately following the award of the scholarship. The
scholarships are a one-time grant for each recipient and not renewable.

Scholarships are overseen by your Program Development and Education Committee.
This committee was established by your board of directors and is a standing committee
of the board of directors. The Committee consists of approximately half of the members
of your board of directors with a variety of backgrounds in business, education and
behavioral health. In addition, your executive director, associate director and senior
consultant for program development and education, serve as ex-officio, non-voting
members of the Committee.

The Committee is responsible for developing the process and procedures for your
scholarship activity and the criteria and application forms, and for periodically reviewing
and updating such processes, criteria, and forms. The Committee receives and reviews
the information received from B regarding recipients selected by Z to insure that each
recipient meets the criteria for the scholarship and to insure that the recipient is not
related to a disqualified person of you. The Committee is responsible for recommending
potential recipients to your full board for approval.

Letter 4792 (10-2012)
Catalog Number 58263T

3

You represent that relatives of members of the selection committee, or of your officers,
directors, or substantial contributors are not eligible for awards made under your
program.

You represent that you will (1) arrange to receive and review grantee reports annually
and upon completion of the purpose for which the grant was awarded, (2) investigate
diversions of funds from their intended purposes, and (3) take all reasonable and
appropriate steps to recover diverted funds; ensure other 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. If a recipient of
the scholarship does not return to B the next academic year following receipt of the
scholarship, the funds are returned to you.

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

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
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:

Letter 4792 (10-2012)
Catalog Number 58263T

4

    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.

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,

Director, Exempt Organizations

Letter 4792 (10-2012)
Catalog Number 58263T