IRS approves two statewide scholarship programs

Plain-English summary

A private foundation asked the IRS to approve a scholarship program with two parts for residents of a designated state. The first part gives one-time awards to high school seniors from each county who have at least a B average and plan further education. The second part gives three renewable awards for study in six specified technical fields, subject to continued enrollment and a 3.0 grade point average. An independent seven-member committee selects recipients based on academic performance, community service, and recommendations, while the foundation monitors the larger awards and seeks recovery of misused funds. The IRS approved both sets of procedures under IRC § 4945(g)(1), so awards made under them will not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation's one-time and renewable statewide scholarship procedures satisfy IRC § 4945(g)(1)?
• Outcome: Approved.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), 4946.

Full text (IRS public release)

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

Release Number: 201445019
Release Date: 11/7/2014 Employer Identification Number:
Date: August 13, 2014

Contact person - ID number:

Contact telephone number:

LEGEND: UIL:

H= individual 4945.00-00
J= corporation
W= program
X= state
Y= newspaper
Z= corporation
c= number
d= dollar amount
g= 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

You will operate a scholarship program called W to provide grants and scholarships to
residents of X. W is comprised of two parts.

Letter 4792 (10-2012)
Catalog Number 58263T

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The first part of the program provides scholarship of d dollars to high school seniors who
wish to enter a technical or trade school as well as enrolling in a two-year or four-year
institution of higher learning. One senior in each of the counties of X will be selected.
The closing date for the annual nomination process is generally established as the end of
September of each year and operates on a yearly basis. The purpose of the program is
to honor students who are dedicated to their schools and their communities.

The student must also have been nominated through W. A student may nominate himself
or herself for a scholarship award, as well as being nominated by a third party.

The criteria used to determine eligibility for these awards are three-fold: First, a student
must be a high school senior enrolled in a public or private school or, alternatively, the
student may be the equivalent of a senior in a home school setting. Second, the pool of
students seeking a scholarship are separated by county in order to ensure that there is
one winner from each county in X. Third, a student must have at least a “B” average in
order to be eligible to win. Each of the judges on the Selection Committee receives the
documentation submitted for a scholarship applicant.

There will be c grants each year of the d dollar awards so long as candidates apply from
each of X’ counties. It is anticipated that only one award per year will be made to a senior
from each X county. In the event, for example, that no student from five different X
counties would apply for an award in a given year, then five less awards would be given.

There are no conditions to maintain the d dollar awards because those awards are one-
time grants. There is no supervision or monitoring these awards other than to verify that
the recipient is a senior in the county that was represented on the nomination form and
has the minimum “B” average.

Under part two of the program, you will provide three residents of X with renewable
scholarships of up to g dollars per year for up to four years. The purpose of these
awards is to help defray the costs of higher education.

You require that an applicant fill out a nomination form (or have a nomination form filled
out on the student's behalf) and have two completed narratives in order to be eligible.
The first narrative may cover one or more of the following topics: Civic/volunteer
involvement, work/entrepreneurship, sports, academic achievement, leadership position
held, youth groups/scouts/church involvement, extra-curricular activities/clubs, other
awards received, and other special talents/interests. The nominator, or the student (if
different), may submit this first narrative. A second narrative must also be submitted.
The second narrative must be completed by the student and must answer the following
question: “What comes next for me after high school? The students must be working on
and maintaining a degree in one of the following majors: (1) Computer Science or
Information Technology, (2) Engineering (Petroleum, Civil, or Chemical), (3) Energy or
Land Management, (4) Environmental Science, (5) Geology, or (6) Safety Science.

Letter 4792 (10-2012)
Catalog Number 58263T

3

The criteria you use to determine eligibility for the larger awards are that the student must
(i) initially’ submit an application for a scholarship as a senior in accordance with the
procedure and with the eligibility criteria described immediately above, and (ii) must be
pursuing a degree in one of the six majors indicated above.

The larger scholarships you award will be used to pay for the students expenses of
attending an accredited college or university in the United States which maintains a
regular faculty and curriculum and is otherwise described in Section 170(b)(1)(A)(ii) of the
Code. In order to receive a renewal of one of these larger awards, you require that the
student must continue to be enrolled and maintain at least a 3.0 grade point average (a
“B” average). A scholarship award must be used for tuition, fees, lodging, books and
supplies. Tuition, fees, and books will be paid directly to the college or university. The
cost of lodging will also be paid directly to the school where applicable.

You monitor the awarding of the larger scholarships, but you do not select the
scholarship recipients. A selection committee sends the contact information of the
winners to you. Each winner must provide you with the tuition invoices for the college or
university they attend and provide his or her grades to demonstrate that he or she is
maintaining at least a “B” average in order for the scholarship to be renewed. The
student must also provide a letter from the school indicating that the required major is
being pursued. If the terms and conditions of these awards are not satisfied, the
scholarship is ended.

You ask the educational institution to acknowledge, in writing, that the scholarship award
can be used only for tuition, fees, books or supplies. The written acknowledgement
required to be returned to you must be attested to by an appropriate official of the
educational institution. Additionally, within one semester of the use of the scholarship
funds, all scholarship recipients will be required to account to you and describe the
manner in which the grant was expended by the recipient. Upon reviewing the
acknowledgements of the educational institutions and the accountings from the
scholarship recipients, you will seek recovery of any misused funds in the event there are
variances from the intended usage. Any recovered monies will be utilized for future
scholarship grants.

Both programs are publicized on your and Y’s website and in an announcement in Y. A
search on either website will direct you to the pertinent application information.
Additionally, each year, information is disseminated about the scholarship programs by Y
to every high school guidance counselor in X.

Each year, Y appoints seven judges to determine the scholarship winners. More
specifically, the individual judges are appointed by H, who is the President and Chief
Executive Officer of Z, which owns Y. When determining which individuals should be
appointed as judges, H solicits input from various general managers of Y in each market
and discusses with the general managers potential appointees. H also talks to various
people in the X Department of Education in an effort to have a broad cross section of
judges make the determination of which students should be entitled to a scholarship.

Letter 4792 (10-2012)
Catalog Number 58263T

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There is no relationship between the judges, your organization, or the students being
considered for scholarship. The judges are employees of Section 501(c)(3) organizations
representing a broad cross section of industry in X. The seven judges serve as the
selection committee, which will determine the scholarship winners. None of the judges
has any affiliation or relationship to you, J, or Y.

The judges individually review all of the students before meeting as a committee. The
committee discusses each applicant and determines by majority vote the winner from
each county as well as the three large scholarships. The winner is based on the
applicant’s academic performance, service to the community, and letter of
recommendation (if any).

Your president maintains the historic records of recipients of scholarships (including the
names, addresses, purposes of the awards, amount, manner of selection). None of the
scholarship recipients may be related to an officer or director of your organization.

With respect to any award you provide, there are no limitations or restrictions in the
selection process based upon race, creed, color, religion, or national heritage.

Children of employees of J are eligible for awards, as well as the children of non-
employees. However, your officers, employees and directors may not derive, either
directly or indirectly, any personal benefit from grants you award. Accordingly,
scholarships shall not be given to an applicant who is a disqualified person with respect
to your organization as defined in Section 4946 of the Internal Revenue Code.

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

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• 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,

Director, Exempt Organizations

Letter 4792 (10-2012)
Catalog Number 58263T