IRS approves renewable high school scholarships

Plain-English summary

A private foundation asked the IRS to approve scholarships for graduating seniors from public high schools in a designated area. Applicants must rank in the top quarter of their class, be U.S. citizens, and plan full-time undergraduate study at a designated university system. A scholarship vendor evaluates applicants, pays awards directly to the school, and maintains recipient case histories, while the foundation gives final approval. The IRS approved the procedures under IRC § 4945(g)(1), so awards made under the approved procedures will not be taxable expenditures. Scholarships may be renewed for up to three years or until the recipient earns a bachelor's degree, subject to satisfactory academic performance.

Ruling snapshot

• Question: Do the foundation's renewable 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: 201445020
Release Date: 11/7/2014 Employer Identification Number:
Date: 8/13/2014

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945-04.04

W=
X=
Y=
Z=
b=

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 W.

You engage in charitable activities by enhancing access to higher education.
Specifically, you provide scholarships each year to graduating seniors at any public X
high school.

Letter 4792 (10-2012)
Catalog Number 58263T

2

Each award is generally $b and subject to change. The number of scholarships that you
award each year and the amount of each scholarship will vary depending on the amount
of funds available to be distributed. Scholarships are renewable up to three years or until
a bachelor’s degree is earned, whichever occurs first, on the basis of satisfactory
academic performance.

You utilize the services of Y (vendor), who advertises the scholarship to schools in the X
Public High Schools by posting it on their website. The vendor maintains the case
histories of the scholarship recipients.

You provide scholarships to students who have attended X Public High Schools. The
following factors are used to evaluate the scholarship recipients;

• work experience,

• activities,

• awards and honors,

• goals and aspirations and

• an applicant appraisal from an instructor, counselor/advisor or work supervisor.

To qualify, students must;

• be graduating seniors at any public X high school,

• be in the top 25% of their graduating class

• be U.S. citizens

• plan to enroll in full-time undergraduate study at any branch of the Z for the entire
upcoming academic year,

Your scholarship vendor selects and recommends the students based on the specific
criteria. You submit final approval of the recipients.

You award all scholarships on an objective and non-discriminatory basis. You do not
award scholarships to disqualified person as defined in Code Section 4946.

Your scholarship vendor pays the scholarship proceeds directly to the university/college
the recipient attends for the benefit of the recipient. Your vendor sends a letter to each
university/college specifying that the university/college’s acceptance of the funds
constitutes the university/college’s agreement to notify you if the scholarship recipient
fails to meet any term or condition of the scholarship.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

3

You will investigate diversions of funds from their intended purposes and take all
reasonable and appropriate steps to recover diverted funds.

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:

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.

Letter 4792 (10-2012)
Catalog Number 58263T

4

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