Undergraduate scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed scholarships for undergraduates at a specified school. Awards would be based on scholastic achievement, academic excellence, and good moral character rather than financial need, and the school would make the final selections. Scholarships could continue for four academic years if recipients maintained satisfactory progress, including a minimum 2.8 grade point average as full-time students. The foundation would pay the school directly, monitor annual reports, investigate and recover diverted funds, withhold future payments when needed, and maintain detailed grant records. The IRS approved the procedures under IRC § 4945(g)(1) and stated that awards used for qualified tuition and related expenses would not be taxable to recipients, subject to IRC § 117(c).

Ruling snapshot

• Question: Did the foundation's undergraduate scholarship procedures satisfy the advance-approval rules for avoiding taxable expenditures?
• Outcome: Approved
• Key authorities: IRC §§ 117 and 4945(g)(1)

Full text (IRS public release)

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

Release Number: 201451059
Release Date: 12/19/2014 Employer Identification Number:
Date: September 22, 2014

Contact person - ID number:

Contact telephone number:

LEGEND

UIL: 4945.04-04

Y =

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 provided in Code section 117(c)).

Description of your request

Your purpose is to provide scholarships for students at Y. 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.

You will provide undergraduate scholarships for students at Y. All scholarships shall be
based upon recipient's scholastic achievement, academic excellence and good moral
character. Financial need shall not be a criterion. No scholarship shall be given to an

. Letter 4792 (10-2012)
ee Catalog Number 58263T

individual who has received scholarship assistance in excess of the tuition and fees
charged by Y. The amount of the scholarship program is determined by the mutual
agreement of the trustee and the scholarship committee of Y.

All scholarships will be for a period of four academic years, provided, however, that a
scholarship shall be terminated if the recipient is not making satisfactory progress toward
an undergraduate degree. A recipient's progress shall be deemed to be unsatisfactory if
he or she has not maintained a minimum of a 2.8 grade point average on a 4.0 scale as a
“full-time student.” Your scholarship program will be publicized through the financial aid
office of Y.

Nominations shall be solicited by the Scholarship Committee of Y. Y will make the final
selection.

Payments will not be made directly to a scholarship recipient. Instead, your trustee pays
the scholarship proceeds directly to Y for the benefit of the recipient. The trustee
provides a letter to Y each university/college specifying that the Y’s acceptance of the
funds constitutes Y’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 Y will not agree to such terms the trustee will obtain the needed reports and grade
transcripts from the scholarship recipient.

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.

You will:

• 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 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 .

Letter 4792 (10-2012)
Catalog Number 58263T

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 may report any significant changes to your program by completing Form 8940
and sending it 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