IRS approves need-based scholarship procedures

Plain-English summary

A private foundation proposed scholarships for financially needy high school graduates from a redacted local area who were enrolled in or accepted by accredited colleges and universities. Applicants would be ranked by grade-point average and financial need, and grants could be renewed without a fixed limit while recipients remained eligible. The foundation would normally pay schools directly, require enrollment and transcript evidence, monitor use of funds, and recover diverted amounts. The IRS approved the objective and nondiscriminatory procedures under § 4945(g)(1), so grants made as proposed would not be taxable expenditures. Awards used for qualified tuition and related expenses also would not be taxable to recipients, subject to § 117(c).

Ruling snapshot

• Question: Did the foundation's need-based scholarship procedures satisfy the advance-approval requirements of § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170, 4945(g)(1), and 4946

Full text (IRS public release)

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

Number: 201450025 Employer Identification Number:

Release Date: 12/12/2014
Contact person - ID number:

Date: September 17, 2014 Contact telephone number:

LEGEND:

S = county/state
T = county
U = county
V = county
W = high school
y = dollar amount
z = dollar amount

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

You will provide scholarships to needy, worthy and ambitious graduates of high schools
in S who are regularly enrolled or accepted for enrollment in accredited colleges or
universities.

Letter 4792 (10-2012)
Catalog Number 58263T

The number of scholarships distributed will vary depending on the amount of funds
available to be distributed. However, it is estimated that anywhere from 300 to 700
individuals are eligible to apply for the scholarship, annually, and you will award between
10 and 20 scholarships. The amount of each award generally ranges from y to z dollars.
You will advertise the award in several local newspapers.

To be eligible, students from W must have a 2.0 grade-point-average (GPA),
demonstrate financial need and be accepted to an accredited college or university.
Graduates of high schools in T, U and V counties may also be considered if the
committee cannot find sufficient qualified candidates from S.

Each year you advise the scholarship selection committee of the amount of funds
available to be awarded as scholarships. The members of the selection committee
review the scholarship applications, rank the applicants based on GPA and financial
need, and makes recommendations to you regarding the individuals selected and the
amount that should be awarded to each applicant. All scholarships are awarded on an
objective and non-discriminatory basis. No scholarship is awarded to any disqualified
person as defined in Code Section 4946.

Each scholarship recipient shall remain eligible for renewals. You request proof of
enrollment and a transcript for each year the student wishes to renew their scholarship.
Past recipients of scholarships are given first consideration for future scholarships so
long as the need exists and the recipient meets the required standards of academic
achievement required by the school attended. There are no limitations on the amount of
times a scholarship can be renewed.

Your trust document names the following five members to your selection committee: a
professional man or woman, a business man or woman, a public school teacher (all of
whom shall be college or university graduates), an S Judge and a church minister located
in S.

You pay the scholarship proceeds directly to the school that the recipient attends for the
benefit of the recipient. You provide a letter to each school specifying that the school’s
acceptance of the funds constitutes the schools agreement to notify you and refund any
unused portion of the scholarship if a scholarship recipient fails to meet any term or
condition of the scholarship.

If the school will not agree to such terms, they are to return the check and you will obtain
proof of enrollment and a grade transcript from the student. You will do this by sending a
grant letter to the student to have them sign to acknowledge individual expenditure
responsibility before any check is mailed to the student. If the student does not sign the
agreement and provide proof of enrollment and grade transcripts, they will not receive the
scholarship.

You arrange to receive and review grantee reports annually and upon completion of the
purpose for which the scholarship was awarded, investigate diversions of funds from their

Letter 4792 (10-2012)
Catalog Number 58263T

intended purpose and take all reasonable and appropriate steps to recover diverted
funds, ensure other scholarship funds held by a recipient are used for their intended
purpose and withhold further payments to recipients until you obtain assurances that
future diversions will not occur and that the recipient will take extraordinary precautions to
prevent future diversions.

You 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 awarded.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

• 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