College scholarship procedures approved

Plain-English summary

A private foundation proposed renewable scholarships for residents of a specified state who attended a particular college. A committee of college faculty members would rank applicants based on academic standing, moral character, and financial need, with special emphasis on technical vocational students and members of a named organization. The committee would recommend recipients and award amounts, while the foundation would make the final decisions based on available funds. Disqualified persons could not receive awards. Payments would go directly to the college, and the foundation would monitor grants, investigate misuse, recover diverted funds when appropriate, and maintain detailed records. 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 college scholarship procedures 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: 201507031
Release Date: 2/13/2015 Employer Identification Number:

Date: November 21, 2014
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

B= website

C= State

D= organization name
X= scholarship name
Y= college name

Z= City, State

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 X.

Your purpose is to in engage charitable activities enhancing access to higher education.
Specifically, you provide scholarships to students who attend Y located in Z who meet the

Letter 4792 (10-2012)
Catalog Number 58263T

2

criteria to attend the college. Students who are residents of C and are attending Y are
eligible to apply for scholarships, and you advertise the scholarship program on the B.

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.

Each year you advise the scholarship advisory committee of the amount of funds
available to be awarded as scholarships. Your scholarship advisory committee consists
of faculty members of Y to assist in making the selections. The members of the
scholarship advisory committee review the scholarship applications and rank the
applications based on the scholastic standings of such persons, their moral character and
financial need with special emphasis to students who are taking technical vocational
training and members of the D. Your scholarship advisory committee then submits its
recommendations to you, and you make the final decision. All scholarships are awarded
on an objective and non-discriminatory basis. No scholarships may be awarded to any
disqualified person in Code Section 4946.

Your scholarship advisory committee also makes a recommendation to you regarding the
amount that should be awarded to each participant. You will make the final determination
as to the amount awarded based on available funds. Scholarships can be renewed as
long as the scholarship requirements are met by the recipient.

You pay the scholarship proceeds directly to Y and provide a letter to Y asking the
college to advise you if any student does not register so that their share may be re-
allocated.

You represent that 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. You will 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 also represent that you will 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 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.

Letter 4792 (10-2012)
Catalog Number 58263T

3

• 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.

• 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