Need-based local scholarships approved

Plain-English summary

A private foundation proposed scholarships for high school seniors in a specified local school system who needed financial help to attend a college, junior college, or university. A committee consisting of the high school's guidance counselor and faculty members would rank applicants based on financial need and academic record, recommend recipients and award amounts, and submit its choices to the foundation. Disqualified persons could not receive awards. The foundation would pay each recipient's school directly, require refund and notification commitments, review reports, investigate misuse, recover diverted funds when appropriate, and keep detailed case histories. The IRS approved the procedures under Section 4945(g)(1), so compliant grants would not be taxable expenditures.

Ruling snapshot

• Question: Did the foundation's need-based local scholarship procedures satisfy the advance-approval rules?
• Outcome: Approved; 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: 201507032
Release Date: 2/13/2015 Employer Identification Number:

Date: November 20, 2014
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

B= name of high school
C= scholarship name
D= City, State

x= number

y= number

z = dollar amount range

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 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 provide in Code section 117(b)).

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

Your purpose is to engage in charitable activities by enhancing access to higher
education. Specifically, you provide scholarships to high school senior boys or girls in the
D school system.

Letter 4792 (10-2012)
Catalog Number 58263T

2

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 Internal Revenue Code Section 4942. There are
currently x members of the senior class and you plan to award y scholarships with the
scholarships between $z. You will publicize the scholarship program through the B
guidance counselor’s office and website.

Scholarships are to be awarded to high school senior boys or girls in the D school system
who desire to enter a college, junior college or university and will require financial
assistance to do so.

The applicant completes the application and submits the application to the Scholarship
Committee. The members of the Scholarship Committee review the scholarship
applications and rank the applications based on the applicant’s need and academic
record. The Scholarship Committee then submits their selections to you. 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.
Your Scholarship Committee also recommends to you the amount to be awarded to each
recipient. You make the final determination as to the amount to be awarded. Your
advisory committee consists of the B guidance counselor and members of the B faculty.

You pay the scholarship proceeds directly to the college, junior college or university the
recipient attends for the benefit of the recipient. You provide a letter to each college,
junior college or university specifying that the college, junior college or university’s
acceptance of the funds constitutes the college, junior college or university’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 college, junior
college or university will not agree to such terms you will obtain the needed reports and
grade transcripts from the scholarship recipient.

You will maintain case histories showing recipients of your scholarships, fellowships,
educational loans, or other educational grants, including names, addresses, purposes of
awards, amount of each grant, manner of selection, and relationship (if any) to officers,
trustees, or donors of funds to you.

You will also (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.

Letter 4792 (10-2012)
Catalog Number 58263T

3

You will also 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.

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 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.

Letter 4792 (10-2012)
Catalog Number 58263T

4

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