Scholarships for underprivileged local students approved

Plain-English summary

A private foundation proposed scholarships for underprivileged students under age 21 from a specified local area. Eligible applicants had to have attended high school in that area, enroll full time, and meet a 2.5 grade-point-average requirement. A public charity would administer the program and rank applicants using academic performance and potential, leadership and activities, work experience, goals, personal circumstances, an outside appraisal, and financial need. The foundation would select recipients and award amounts, while disqualified persons were ineligible. Awards could be renewed while students continued to meet the age, enrollment, and grade requirements, and payments would go directly to schools with monitoring and recovery protections. The IRS approved the procedures under Section 4945(g)(1), effective from the date the request was submitted.

Ruling snapshot

• Question: Did the foundation's local scholarship procedures for underprivileged students satisfy the advance-approval rules?
• Outcome: Approved effective May 17, 2013; grants made under the described procedures will not be taxable expenditures
• 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: 201507027
Release Date: 2/13/2015 Employer Identification Number:

Date: 11/17/2014
Contact person - ID number:

Contact telephone number:

UIL: 4945.04-04

LEGEND

M= Scholarship Program Name

B= Scholarship Management Company Name
C= County

D= Location

E= State

x= 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
Your letter indicates you will operate a scholarship program called M.

You engage in charitable activities by providing scholarship funds for the education of under-privileged children under the age of twenty-one years residing in the County of C

Letter 4792 (10-2012)
Catalog Number 58263T

2

and will be selected from and reside within the territorial limits of D area.

The information submitted indicates that scholarships funded by you will be administered, supervised, and paid out by B. B is exempt from federal income tax under section 501(c) (3) of the Internal Revenue Code and has been classified as a publicly supported organization.

The number of scholarships 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 are 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.

The scholarship fund is publicized at x high schools (public and private high schools) in the D area of E, via promotional flyers mailed to the schools and through B’s website.

Eligible candidates are students who attended high school in the D area, are under the age of 21 at the beginning of the academic year, are full-time students (i.e., 12 units), and achieve at least a 2.5 cumulative GPA while in high school or a 2.5 term GPA while in college.

You will review the scholarship applications and the ranked list of applicants provided by B (ranked 30% on past academic performance and future potential, 30% on leadership and participation in school and community activities, work experience, statement of career and educational aspirations and goals, unusual personal or family circumstances, and an outside appraisal and 40% on financial need). You will then select the student or students who will receive the funds and the amounts. 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 scholarships are renewable if the applicants are under the age of 21 at the beginning of the academic year, are full-time students (i.e., 12 units) and achieve at least a 2.5 cumulative GPA while in high school or a 2.5 term GPA while in college.

B pays the scholarship proceeds directly to the university/college the recipient attends for the benefit of the recipient and provides a letter to each university/college specifying that the university/college’s acceptance of the funds constitutes the university/college’s agreement to (1) refund any unused portion of the scholarship if a scholarship recipient fails to meet any term or condition of the scholarship and (2) notify B if the scholarship recipient fails to meet any term or condition of the scholarship. If the university/school will not agree to such terms, B will obtain the needed reports and grade transcripts from the scholarship recipient.

B will maintain case histories showing recipients of your scholarships including names, addresses, purposes of scholarships, amount of each scholarship, manner of selection, and relationship (if any) to officers, trustees, or donors of funds.

Letter 4792 (10-2012)
Catalog Number 58263T

3

You represent that you will (1) arrange to receive and review recipient reports annually and upon completion of the purpose for which the scholarship was awarded, (2) investigate diversions of funds from their intended purposes, and (3) take all reasonable and appropriate steps to recover diverted funds. You will ensure other scholarship funds held by a recipient are used for their intended purposes, and will withhold further payments to recipients until you obtain recipients’ assurances that future diversions will not occur.

You also represent that you will maintain all records relating to individual scholarships including information obtained to evaluate recipients, identify whether a recipient is a disqualified person, and establish the amount and purpose of each scholarship along with the supervision and investigation of such scholarships.

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. The effective date of our approval is May 17, 2013, which is the date your request was submitted.

• 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

4

• 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