IRS approves college scholarship procedures

Plain-English summary

A private foundation asked the IRS to approve scholarships for students enrolled or planning to enroll at a designated college. Applicants must demonstrate financial need, above-average scholarship, and high moral character, and continued aid requires enrollment and a 2.50 grade point average. A committee with representatives of the foundation and college recommends award amounts, and the foundation pays the school directly. The IRS approved the procedures under IRC § 4945(g)(1), so grants made under the approved procedures will not be taxable expenditures. The awards also may be excluded from recipients' income under IRC § 117 when used for qualified tuition and related expenses.

Ruling snapshot

• Question: Do the foundation's procedures for awarding college scholarships satisfy IRC § 4945(g)(1)?
• Outcome: Approved.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4942, 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: 201445023
Date: 11/7/2014 Employer Identification Number:

Date: August 12, 2014
Contact person - ID number:

Contact telephone number:

LEGEND: UIL:
X= college 4945.04-04
Y= city, state

b = dollar amount
c = dollar amount
d = number

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 enhance access to higher education by providing scholarships to students who
are or will be enrolled in X at Y.

Generally, the amount of each scholarship will be between b and c dollars, but will be
dependent upon the amount available you are required to annually distribute to satisfy
Code Section 4942. The number of awards made each year would generally range from

Letter 4792 (10-2012)
Catalog Number 58263T

2

10-20. You estimate the number of applications received to be between 75-100 annually.
The number of students’ currently attending X is approximately d. X publicizes the
scholarship through their school website.

Criteria for selection includes meeting minimum requirements of financial need,
matriculation as a student at X, above average scholarship and high moral character. All
scholarships are awarded on an objective and non-discriminatory basis. No scholarship
may be awarded to any disqualified person as defined in Code Section 4946.

The scholarship committee recommends the amounts based on the amount of funds
available, taking into consideration the need of each student. Your committee is
composed of one representative of you and three representatives from X.

You shall continue assistance provided the individual continues matriculation as a
student at X, maintains an overall grade point average of 2.50, never appears on any list
published by an agency of the United States indicating sympathy with or membership in
any organization which is subversive to the interests of the United States and that in your
opinion is worthy of further financial assistance.

You will pay the scholarship proceeds directly to the university/college the recipient
attends for the benefit of the recipient. You will provide a letter to each university/college
specifying that the university/college’s acceptance of the funds constitutes the
university/college’s agreement to (i) refund any unused portion of the scholarship if a
scholarship recipient fails to meet any term or condition of the scholarship; and (ii) notify
you if the scholarship recipient fails to meet any term or condition of the scholarship. If
the university/school will not agree to such terms the trustee will obtain the needed
reports and grade transcripts from the scholarship recipient.

If the school does not agree to the terms of the letter, they are to return the check and
individual expenditure responsibility, which would require proof of enrollment, would be
done by sending a grant letter to the student and having them sign before any check is
mailed. If the student does not sign the agreement, they would not receive the
scholarship.

You represent that you will:

• Arrange to receive and review grantee reports annually and upon completion of
the purpose for which the grant was awarded;

• Investigate diversions of funds from their intended purposes;

• 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 also 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 described above. You will maintain
such information and documentation until the applicable statute of limitations period
expires.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

4

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