Scholarship procedures receive advance approval

Plain-English summary

A non-exempt charitable trust sought advance approval for scholarships to graduates of a specified high school who would attend agricultural colleges. Applicants would be evaluated on activities, service, leadership, financial need, future plans, and an essay, with a school-based advisory committee making recommendations and the trust making final selections. Awards would be objective, nondiscriminatory, nonrenewable, paid directly to schools, and unavailable to disqualified persons. The trust also adopted reporting, diversion-investigation, recovery, payment-withholding, and recordkeeping procedures. The IRS approved the procedures under IRC § 4945(g)(1), so grants made under them would not be taxable expenditures, assuming the program operated as proposed.

Ruling snapshot

• Question: Did the trust's scholarship procedures satisfy the advance-approval requirements of IRC § 4945(g)?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170, 4945(g), 4946, and 4947(a)(1)

Full text (IRS public release)

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

Number: 201504019 Employer Identification Number:

Release Date: 1/23/2015
Contact person - ID number:

Date: 10/29/14 Contact telephone number:

LEGEND UIL: 4945.04-04

B= Scholarship
C= High School
x = Number
y = 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 Non-Exempt Charitable Trust (NECT) described in Section 4947(a)(1). 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 will not 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 in Code section 117(b)).

Description of your request
Your letter indicates you will operate a scholarship program called B.

You engage in charitable activities by enhancing access to higher education. Specifically,
you provide scholarships to students that graduated from C to attend an agricultural
college of their choice.

Letter 4792 (10-2012)
Catalog Number 58263T

Information about B is found on C’s website. Applicants must submit an application to C
and must provide biographical information as well as a description of athletic
involvement, community service hours, and participation in fine arts activities, leadership
positions as well as an essay addressing the following:

• The applicant's qualifications for a scholarship including activities, honors,
  citizenship, community service, and work experience.

• The applicant’s reasons why a scholarship is needed and deserved.

• The applicant’s future plans including where the applicant will be going to school,
  area of study, and eventual career goals.

The number of scholarships that you will award each year and the amount of each
scholarship will vary depending on the amount of funds available to be distributed. The
trust is required to annually distribute the greater of the net income of the trust or the
amount that must be distributed to satisfy Code Section 4942. You estimate that you will
award x awards annually and roughly y students are eligible to apply.

Each year you will advise your scholarship advisory committee which currently consists
of the principal and the counselor from C the amount of funds available to be awarded as
scholarships. The committee will then review and rank the applications. The committee
submits its recommendations and the recommended amount of the award to you. You
will make the final selection and determine the award amount. All scholarships are
awarded on an objective and non-discriminatory basis. No scholarship may be awarded
to any disqualified person as defined in Internal Revenue Code Section 4946. The
scholarships are non-renewable.

You will pay the scholarship proceeds directly to the university/college the recipient
attends for the benefit of the recipient. You will also 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 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 (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.

You represent that you will maintain all records relating to individual grants, including

Letter 4792 (10-2012)
Catalog Number 58263T

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.

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 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.

Letter 4792 (10-2012)
Catalog Number 58263T

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