Need-based scholarship procedures approved

Plain-English summary

A private foundation proposed funding scholarships administered by a public charity for students from a specified geographic area. Eligible applicants had to be citizens or legal residents, graduates of designated local schools, and enrolled for a full academic year in an accredited college, university, or vocational technical school. Selection considered academic records, leadership, community activities, personal or family circumstances, honors, work experience, an outside appraisal, and demonstrated financial need. The foundation's trustee would not participate, and disqualified persons could not receive awards. The administrator would pay schools directly, monitor recipients, and keep detailed grant records. The IRS approved the procedures under Section 4945(g)(1), so grants made as described would not be taxable expenditures and qualified educational use could be tax-free to recipients under Section 117.

Ruling snapshot

• Question: Did the foundation's need-based 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: 201507035
Release Date: 2/13/2015 Employer Identification Number:

Date: 11/18/2014
Contact person - ID number:

Contact telephone number:

LEGEND UIL 4945.04-04

B= Name
C= Name
D= Location
E= Name
F= Name
G= Name

x dollars = Amount
y = 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 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 provided in Code section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program called C. You engage in
charitable activities by enhancing access to higher education. Specifically, you will

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provide scholarships to worthy, needy and ambitious students residing in the
geographical area of D to further their education at secondary schools, and at universities
including professional schools and post graduate education.

Grants 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. You will make annual contributions
to B to fund scholarships annually. The amount of each award is generally at least x
dollars and is dependent upon the amount available you are required to annually
distribute needed to satisfy Code Section 4942.

B will promote C to schools in the D area using fliers and posters as well as by posting
information about C on its website. In addition, applications and their instructions are
available on B’s website; the applications are sent directly to B.

To be eligible, applicants must be a United States citizen or legal resident, a graduate of
any private or charter school located in D or a graduate of a high school from E, F, or G
Unified School district in D and currently enrolled in undergraduate or graduate study at
an accredited two or four year college, university or vocational technical school for an
entire academic year.

Applicants must submit detailed biographical information including lists of activities,
awards, work experience, other scholarships and financial information from their
individual and their parents Form 1040 if the applicant is a dependent. Applicants must
also provide transcripts and have a high school or college counselor or advisor, an
instructor or work supervisor complete an outside appraisal. Incomplete applications will
not be considered.

B will evaluate the applicants and select recipients based on the academic record,
demonstrated leadership and participation in school and community activities, unusual or
family circumstances, honors, work experience and the outside appraisal. Financial
need will be calculated by B and must be demonstrated to receive an award. All awards
are made on an objective and nondiscriminatory basis. No scholarship will be awarded to
any disqualified person as defined in Code Section 4946. In no instance does your
trustee play a part in the selection.

Awards are not renewable but students may reapply as long as they meet the renewal
eligibility criteria. To qualify, they must maintain a grade point average of at least y,
continue to show financial need and continue to further their education at secondary
schools, at universities, including professional schools for post graduate education.

B will notify the recipients by early summer and will send a letter to each recipient’s
university/college specifying the university/college’s acceptance of funds constitutes their
agreement to notify you if the recipient fails to meet any term or condition of the
scholarship. Upon acceptance, B will make payments in two installments directly to the
recipient’s school for the recipient’s benefit. Recipients are required to notify B of any

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changes in address, school enrollment or other relevant information and to send B a
complete transcript when requested. B will maintain books and records, case histories of
all recipients who receive grants or contributions from you; the case histories include the
names/addresses of each recipient, the purpose of the grant and amount of each grant to
each recipient, as well as the manner of selection of each recipient.

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 do
not 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 may report any significant changes to your program by
completing Form 8940 and sending it 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.

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We have sent a copy of this letter to your representative as indicated in your power of
attorney.

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 of Exempt Organizations

Letter 4792 (10-2012)
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