County resident scholarships receive advance approval

Plain-English summary

A private foundation sought advance approval for scholarships for residents of a named county and state who selected their own college or university. The trust agreement considered character, above-average intelligence, scholastic record, and financial need. The advisory committee also ranked applicants by grade point average and need, verified at least two years of local residence, and required students to apply each year. Awards went directly to schools, which had to refund unused funds and report failures to satisfy scholarship conditions, while disqualified persons were ineligible. The IRS approved the procedures under section 4945(g)(1), effective from the request date, subject to reports, diversion recovery, withholding, and recordkeeping.

Ruling snapshot

• Question: Do the county resident scholarship procedures qualify for advance approval?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4942, 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: 201509042
Release Date: 2/27/2015 Employer Identification Number:

Date: 12/2/2014
Contact person - ID number:

Contact telephone number:

LEGEND

UIL: 4945.04-04

X= County and 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

You provide scholarships to students who are residents of X, who meet the criteria set
forth in your trust agreement to attend the university or college selected by the recipient.
The criteria include:

• The character of the individual

• The intelligence of the individual, which shall be above average
• The scholastic record of the individual

• The need of the individual

The number of scholarships you award each year and the amount of each scholarship
will vary depending on the amount of funds available to be distributed. The trust is

Letter 4792 (10-2012)
Catalog Number 58263T

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.

The local high schools post scholarship information in the counselors’ offices, which are
accessible to all students.

The scholarship advisory committee reviews the applications and advises you regarding
the amount to be awarded to each applicant. Each year you advise the scholarship
advisory committee of the amount of funds available to be awarded as scholarships. The
members of the scholarship advisory committee review the scholarship applications and
rank the applicants based on grade point average and financial need, as well as ensure
recipients have been residents of X for at least two years. The scholarship advisory
committee then submits its selection 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 Code Section 4946. Students must apply each year.

You pay the scholarship proceeds directly to the university or college the recipient
attends for the benefit of the recipient. You provide a letter to each university or college
specifying that the their acceptance of the funds constitutes their 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 you if the scholarship recipient fails to meet any
term or condition of the scholarship. If the school will not agree to such terms you 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.

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 their assurances that future
diversions will not occur and that they will take extraordinary precautions to prevent future
diversions.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

• 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 October 4, 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.

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