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

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• 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