Scholarship procedures for terrorism victims' family members approved

Plain-English summary

A private foundation proposed scholarships for dependent family members of people who died while working at its facilities during the September 11, 2001 terrorist attacks, as well as children of victims of a future terrorist attack in a specified place. It would fund postsecondary education for eligible family members without considering grades or financial need, while possible elementary and secondary awards would depend mainly on financial need and graduate awards would consider need and academic merit. Insiders and disqualified persons could not apply. The foundation would generally pay schools directly, verify enrollment and good standing, require reports, investigate misuse, and recover diverted funds when required. The IRS approved the procedures under Section 4945(g)(1), so compliant grants 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 scholarship procedures for affected family members 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), and 4945(g)(1); Treas. Reg. § 53.4945-4(c)(5)

Full text (IRS public release)

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

Release Number: 201507037
Release Date: 2/13/2015 Employer Identification Number:

Date: 11/21/2014
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

W=
X=
Y=
Z=
b dollars=

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 in Code section 117(c)).

Description of your request

Your letter indicates you will operate a scholarship program called X.

Letter 4792 (10-2012)
Catalog Number 58263T

2

Your purpose is to pay all or a part of a recipient’s expenses incurred in attending an
educational institution described in section 170(b)(1)(A)(ii) of the Code.

The purpose of X is to provide educational grants and scholarships to dependent family
members ("Affected Family Members") of individuals who were employed by or working
under contract at your facilities and who perished in the September 11, 2001 terrorist
attacks. Children of victims of any future “act of terrorism” taking place in W shall also be
eligible to apply for X.

You will award approximately Y awards annually for the next Z years in the amount of b
dollars for each recipient. You will pay for the postsecondary education (including tuition,
room and board and standard matriculation fees) of each Affected Family Member. Your
Board of Directors will make a conservative estimate each year of the funds it must
reserve in order to fulfill your primary mission (the "Primary Mission Reserve") based
upon a number of factors including the number of Affected Family Members who have yet
to complete college, the projected costs of college tuition and expenses, the past and
projected performance of your assets and other economic factors. To the extent that you
have assets in excess of its Primary Mission Reserve, you may consider providing
scholarships to Affected Family Members to assist with the costs of elementary,
secondary and graduate (post-college) education. While post-secondary educational
scholarships may be granted to Affected Family Members who apply, scholarships for
elementary and secondary education will be based primarily on financial need, while
scholarships for graduate education will be based on a combination of financial need and
academic merit.

You will maintain a list of families with Affected Family Members. All families with
Affected Family Members have been notified and reminded periodically in writing of the
availability of educational scholarships. You will send a letter each year to each family
with Affected Family Members reminding them of the availability of scholarships and
inviting them to apply. In addition, you will monitor the ages of Affected Family Members
and will reach out personally (by letter, email or telephone) to Affected Family Members
who are high school juniors and seniors to encourage them to apply for scholarships. You
will send a personal letter to Affected Family Members who were high school juniors and
seniors at the beginning of the school year describing your college scholarship program.
You will contact high school seniors towards the end of the school year to determine their
educational plans for the following year and encourage the submission of a scholarship
application.

You will not consider grades for initial eligibility for a postsecondary scholarship.
However, you will ask the recipient’s secondary school to confirm that the recipient
graduated and a transcript will be required to verify a recipient’s good standing at his or
her postsecondary school in subsequent years. You will require an applicant seeking
financial assistance for costs related to enrollment other than tuition, room and board and
standard matriculation fees such as books, health insurance or computer supplies, to
submit information demonstrating financial need.

Letter 4792 (10-2012)
Catalog Number 58263T

3

Members of your Board of Directors, officers, relatives of such directors or officers and
disqualified persons with respect to you are ineligible to apply for scholarships.

You will use objective and nondiscriminatory selection criteria in awarding educational
grants. You may make grants for postsecondary education (tuition, room and board,
standard matriculation fees) to each Affected Family Member who requests assistance.
Once you substantiate an application, you will award a full scholarship regardless of
need. In any year that you have assets in excess of the Primary Mission Reserve, you
will award scholarships for elementary, secondary and graduate educational expenses of
Affected Family Members. You will award scholarships for pre-college education based.
on financial need. You will award scholarships for post-college education based on a
combination of criteria including financial need, prior academic performance and other
achievements. You will not consider factors such as race, gender, ethnicity or religion in
the selection of recipients.

To remain eligible for a scholarship, the recipient must submit evidence (e.g., transcript)
to you each year to verify his or her enrollment and good standing at the educational
institution. You will make payments directly to educational institutions described in
section 170(b)(1)(A)(ii) of the Code. You will supervise, investigate, and review
scholarships by complying with the requirements of section 53:4945-4(c)(5) of the
Treasury Regulations. You will require each institution to which such scholarships are
paid to agree to use funds from the scholarship to defray a recipient’s expenses or to pay
the funds (or a portion thereof) to a recipient only if the recipient is enrolled at such
institution and the recipient’s standing at the institution is consistent with the purposes
and conditions of the scholarship.

You will undertake supervision and investigation of the grant if the educational institution
does not agree to monitor the recipient’s standing or if you make a payment directly to
the recipient. With respect to a scholarship under section 4945(g)(1) of the Code paid
directly to a recipient for study at an educational institution described in section
170(b)(1)(A)(ii) of the Code, you will ensure that it receives at least once per year a
report, verified by the educational institution attended by the recipient, that sets forth the
recipient’s courses taken and grades received in each academic period. In the case of a
recipient whose study at an educational institution does not involve the taking of courses
but only the preparation of research papers or projects, such as the writing of a doctoral
dissertation, you will ensure that it receives at least once per year a brief report, approved
by the faculty member supervising the recipient or by another appropriate university
official, regarding the progress of the recipient’s paper or project. Upon completion of the
recipient’s study at the educational institution, you also will obtain a final report describing
the recipient’s accomplishment with respect to the scholarship and accounting for the
funds received under such scholarship.

If there are reports to you or other information (including failure to submit reports after a
reasonable time has elapsed from their due date) indicates that all or any part of grant
funds are not being used for the purposes of such grant, you will initiate an investigation.
While conducting the investigation, you will withhold further payments to the extent
possible until you have determined that no part of the grant has been used for improper

Letter 4792 (10-2012)
Catalog Number 58263T

4

purposes, and until any delinquent reports have been submitted. If you determine that all
or any part of a scholarship has been used for improper purposes and the recipient has
not previously diverted funds, you will take all reasonable and appropriate steps either to
recover the funds or to ensure the restoration of the diverted funds and the dedication of
other scholarship funds held by the recipient to the proper purposes. You will withhold
any further payments to the recipient until you have received the recipient’s written
assurance that future diversions will not occur, and have determined that the recipient
has taken extraordinary precaution to prevent future diversions from occurring. In cases
where a recipient has previously diverted funds received from you, and you determine
that any part of a scholarship has again been used for improper purposes, you will take
all reasonable and appropriate steps to recover the funds or to ensure the restoration of
the funds and the dedication of other scholarship funds held by the recipient for their
proper purposes. Furthermore, you will withhold any further payments to the recipient
until the diverted funds are in fact recovered or restored, you have received the
recipient’s written assurance that future diversions will not occur, and you have
determined that the recipient has taken extraordinary precautions to prevent future
diversions from occurring.

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:

Letter 4792 (10-2012)
Catalog Number 58263T

5

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.

We’ve 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, Exempt Organizations

CC:

Letter 4792 (10-2012)
Catalog Number 58263T