Blind merit scholarship procedures approved

Plain-English summary

A private foundation proposed awarding two annual merit scholarships to graduates of a specified school district. Each award covered one full year of tuition at a state-supported college or university. A guidance counselor would remove applicants' names before giving the materials to a selection committee made up of current school board members, and the two highest-ranked applicants would win. Relatives of committee members and foundation insiders were ineligible, and the one-year awards were not renewable. The foundation would pay schools directly and use reporting, monitoring, recovery, and recordkeeping procedures to address any misuse. 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 blind-selection procedures for two merit scholarships satisfy the advance-approval rules?
• Outcome: Approved effective July 25, 2014; grants made under the described procedures will not be taxable expenditures
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)(1)

Full text (IRS public release)

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

Release Number: 201507033
Release Date: 2/13/2015 Employer Identification Number:

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

Contact telephone number:

LEGEND UIL
4945.04-04

X= school district

Y= 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 purpose is to award scholarships annually to two deserving students based on merit in the X in Y.

Due to inflation, the current amount awarded to each student is one full year’s worth of tuition at a state supported university or college in the State of Y.

The scholarship is publicized at the school to the students in the X. To be eligible for a scholarship, students must be graduates of the X.

Letter 4792 (10-2012)
Catalog Number 58263T

2

The selection committee is made up of current members of the Board of Education of the X.

The students turn in their scholarship application materials to the guidance counselor who removes any name information to keep the selection process blind. The guidance counselor then gives the application materials to the selection committee. They rank the applicants and the two top students are awarded the scholarships. The scholarship winners are announced at the graduation ceremony.

Relatives of member of the selection committee and relatives of your officers, directors and substantial contributors are not eligible for scholarships. The scholarships are not renewable as they are just for the first year of college.

You pay the scholarship proceeds directly to the university/college the recipient attends for the benefit of the recipient. You provide a letter to each university/college specifying that the university/colleges 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 arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded, investigate diversions of funds from their intended purposes, and 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 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.

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).

Letter 4792 (10-2012)
Catalog Number 58263T

3

• 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 July 25, 2014, 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