Scholarships for middle-ranked students approved

Plain-English summary

A private foundation operated a scholarship program for financially needy high school graduates who wanted to attend an accredited college in a specified state. Applicants generally had to rank in the middle third of their graduating class, show good character and ability, demonstrate a desire to attend college, and meet any additional selection criteria. A three-person committee consisting of a trustee officer, an educator, and a businessperson or other professional would make the selections, and disqualified persons could not receive awards. Scholarship proceeds would go directly to the recipient's school, with reporting, monitoring, recovery, and recordkeeping procedures for misuse. The IRS approved the procedures under Section 4945(g)(1), effective from the date the request was submitted, so compliant grants would not be taxable expenditures.

Ruling snapshot

• Question: Did the foundation's scholarship procedures for financially needy, middle-ranked students satisfy the advance-approval rules?
• Outcome: Approved effective May 16, 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
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201507034
Release Date: 2/13/2015
Date: November 20, 2014

LEGEND

B= name of cities

X= name of scholarship
Y= state

Z= city, state

Department of the Treasury

Employer Identification Number:
Contact person - ID number:

Contact telephone number:

UIL: 4945.04-04

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 operate a scholarship program called X.

Letter 4792 (10-2012)
Catalog Number 58263T

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The purpose of X is to enhance access to higher education. Specifically, you provide
scholarships to students who are high school graduates desiring to attend an accredited
Y college for further education.

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. The
trust is 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.

You advertise in the local newspaper of Z. Letters are also sent to the area high schools
in B.

High School graduates must be in financial need, have a class rank in the middle one-
third in his or her class at the inception of his or her candidacy for a scholarship, be of
good character and ability along with demonstrating a desire and willingness to further his
or her education in college, demonstrate adaptability in association with other students,
and any further requirements as designated by your selection committee. The
scholarship committee will review the applications for these requirements.

Each year the trustee advises your selection committee of the amount of funds available
to be awarded as scholarships. The members of your committee review the scholarship
applications based on the eligibility criteria and then make the final selections. All
scholarships are awarded on an objective and non-discriminatory basis. No scholarships
are awarded to any disqualified person as defined in Code Section 4946.

Your organizing document states that the selection committee will consist of three
persons selected by you, an officer of the trustee corporation, an educator, and a
businessperson or other professional.

You distribute the scholarship proceeds directly to the university/college the recipient
attends for the benefit of the recipient. The trustee provides a letter to each
university/college specifying that the their acceptance of the funds constitutes 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 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

Letter 4792 (10-2012)
Catalog Number 58263T

3

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.

• 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 16, 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.

Letter 4792 (10-2012)
Catalog Number 58263T

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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