IRS approves need-based scholarships at five colleges

Plain-English summary

A private foundation sought advance approval for scholarships to financially needy students attending five named colleges and universities in one state. The schools would publicize the program, and a committee made up of their presidents would rank applicants by financial need. A trustee would decide the recipients and award amounts, exclude disqualified persons, and pay the selected school directly. The schools would agree to refund unused funds and report violations, while the trustee would obtain annual reports, transcripts, and assurances against diversion. The IRS approved the procedures under § 4945(g)(1), so compliant scholarship payments would not be taxable expenditures.

Ruling snapshot

• Question: Did the need-based scholarship program use objective selection and adequate monitoring to satisfy § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), and 4946

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201449004 Employer Identification Number:
Release Date: 12/5/2014
Date: September 12, 2014 Contact person - ID number:

Contact telephone number:

Legend:

B = State

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.

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(c)).

Description of your request

Your purpose is to provide scholarships to students attending one of five named colleges
and universities in the state of B. The number of scholarship that will be awarded each
year and the amount of each scholarship will vary depending on the amount of funds
available to be distributed.

Eligible recipients will be students who are attending with pecuniary needs. Scholarships
are publicized in the financial aid office of the schools.

Letter 4792 (10-2012)
Catalog Number 58263T

You will maintain case histories showing recipients of your scholarships, or educational
grants, including names, addresses, purposes of awards, amount of each award, manner
of selection, and the relationship (if any) to officers, trustees or donors of funds to you.

Each year the trustee advised the Scholarship Committee of the amount of funds
available to be awarded as scholarships. The members of the Scholarship Committee
review the scholarship applications and rank the applicants based on pecuniary needs.
The Scholarship Committee then submits its recommendation to the trustee which make
the final selection. All scholarships are awarded on an objective and non-discriminatory
basis. No scholarships may be awarded to any disqualified person as defined in Code
Section 4946. The Scholarship Committee is composed of the Presidents of the five
named colleges and university.

The trustee pays the scholarship proceeds directly to the university/college the recipient
attends for the benefit of the recipient. The trustee provides 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 the trustee 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.

You will arrange to receive and review grantee reports annually and upon completion of
the purpose for which the grant was awarded; to investigate diversions of funds from their
intended purposes; and take all reasonable and appropriate steps to recover diverted
funds, ensure other grants funds held by the grantee are used for their intended
purposes, and withhold further payments to grantee until you obtain grantees assurances
that future diversions will not occur and the grantees will take extraordinary precautions
to prevent future diversions from occurring.

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

Letter 4792 (10-2012)
Catalog Number 58263T

• 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.

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