Scholarships for students formerly in institutional care receive approval

Plain-English summary

A private foundation proposed one-time, renewable-by-reapplication scholarships for students who were or had been residents of nonprofit or institutional children's homes, lacked a nurturing home environment, and needed financial help for post-secondary education. The board would select recipients based on academic potential and financial need, excluding insiders and their families. Grants could be paid to schools or directly to recipients, with receipts required for direct payments and unused funds recoverable if conditions were violated. The foundation also committed to reports, diversion investigations, recovery efforts, and grant records. The IRS approved the procedures under IRC § 4945(g)(1), and said qualifying awards used for tuition and related expenses would not be taxable to recipients subject to § 117(b).

Ruling snapshot

• Question: Did the scholarship procedures for financially needy students with institutional-care backgrounds satisfy the advance-approval rules?
• Outcome: Approved
• Key authorities: IRC §§ 117(b), 170(c)(2)(B), and 4945(g)(1)

Full text (IRS public release)

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

Number: 201442059 Employer Identification Number:

Release Date: 10/17/2014
Contact person - ID number:

Date: July 21, 2014
Contact telephone number:

LEGEND UIL: 4945.04-04

w= Quantity
x= Quantity
y dollars= 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 in Code section 117(b)).

Description of your request

Your letter indicates you will operate a grant program. The purpose of your grants will
be to enable qualified individuals to obtain a post-secondary education at either the
college/university or graduate school level by defraying the cost of tuition, books, fees
and similar expenses.

Initially, you expect to award w grants annually. In the future, you may receive additional
funding in the form of lifetime or testamentary gifts, which may enable you to eventually
award up to x grants annually. The amount of grants is expected to be in the range of y
dollars annually. Grants are made on a one-time basis. If a student desires to extend his

Letter 4792 (10-2012)
Catalog Number 58263T

or her eligibility for a grant, he or she must re-apply and submit updated academic and
financial information.

Eligibility is limited to individuals who are, or have been, residents of a non-profit or other
institutional home for the care of children within the United States who have been
deprived of a loving and nurturing home environment as well as lack the financial
resources to continue their education. Each applicant must complete an application and
have earned a high school or a general equivalency diploma and provide supporting
documentation. Any existing or prospective student at any high school, college, or
graduate school may apply.

You will publicize the availability of your grants in a manner that makes availability
known to a broad charitable class of individuals including through the development of a
website with information and application materials, and through personal or written
contacts with high school, college, and graduate school administrators and other
interested persons.

The selection committee will consist of the members of your board of directors.
Vacancies on your board are filled by the vote of the members of the board of
directors. No grants may be awarded to the members of your board of directors,
officers, substantial contributors, or their family members; to any member of the
selection committee; or for a purpose that is inconsistent with the purposes described
in I.R.C section 170(c)(2)(B).

The criteria for selection of recipients will be academic potential and financial need. In
determining an applicant's academic potential, you will consider the grade point
average, transcript of courses, evidence of responsible citizenship and leadership
potential through participation in extracurricular or community activities. Additionally, you
will require at least one letter of recommendation from a teacher or employer. No
minimum grade point average will be required. However, the applicant must have
satisfactorily earned a diploma and demonstrated the potential to succeed at the post-
secondary level.

Each applicant must submit a signed financial statement showing a complete list of
his or her assets, liabilities, and income. It is anticipated that very few of the
applicants will be receiving any parental financial support. You will limit your awards
to applicants whose financial statements demonstrate they would be unable to afford
the cost of their education.

In some cases, you will pay grants directly to the educational institution. In other
cases, you will pay the grant directly to the recipient for him or her to use at a
qualifying educational institution. Each educational institution and recipient must
agree in writing to use the grant funds to defray the recipient's expenses only if the
recipient is enrolled at a qualifying educational institution and his or her standing is
consistent with the purpose and conditions of the grant. The recipient will be required
to provide copies of cancelled checks, receipts, or similar documentation for

Letter 4792 (10-2012)
Catalog Number 58263T

distributions that are made directly to the recipient. No documentation will required
when funds are distributed directly to an educational institution.

Failure to use the funds for the prescribed purposes or to remain a student in good
standing will result in immediate termination of the grant award and require that the
recipient return all unused funds. A grant will be used only for qualified tuition and
related expenses within the meaning of I.R.C. section 117(b)(2) (tuition and fees
required for the enrollment or attendance of the student at a qualifying educational
institution and fees, books, supplies, and equipment required for courses of instruction
at such an educational institution), and for room, board, travel, and other similar
school-related expenses.

You represent that you will complete the following: (1) arrange to receive and review
grantee reports annually and upon completion of the purpose for which the grant was
awarded, (2) investigate diversion of funds from their intended purposes, and (3) take all
reasonable and appropriate steps to recover the diverted funds, ensure other grant funds
held by a grantee are used for their intended purposes, and (4) 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 diversion from
occurring.

You represent that you will maintain the following: (1) all records relating to individual
grants including information obtained to evaluate grantees, (2) identify a grantee is a
disqualified person, (3) establish the amount and purpose of each grant, and (4) establish
that you undertook the supervision and investigation of grants described above.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

• You cannot rely on the conclusions in this letter if the facts you provided have
changed substantially. You may report any significant changes to your program by
completing Form 8940 and sending it 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.

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