Catholic school scholarships receive advance approval

Plain-English summary

A private foundation sought advance approval for scholarships covering tuition and books at Catholic primary and secondary schools in a named area. Applicants needed financial assistance and at least a 3.0 grade point average, and the advisory committee ranked them using those factors. The church pastor and school principal served as trustees and made the final selections, while disqualified persons could not receive awards. Scholarships were renewable and paid directly to schools, which had to refund unused funds and report failures to satisfy scholarship conditions. The IRS approved the procedures under section 4945(g)(1), subject to annual reports, investigation and recovery of diverted funds, and grant recordkeeping.

Ruling snapshot

• Question: Do the Catholic school scholarship selection and supervision 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: 201509043

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
r dollars= Dollar amount
s dollars = Dollar amount

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 provide in Code section 117(b)).

Description of your request
You provide scholarships to students to pay for tuition and books at catholic schools at
the primary and secondary levels located in the X area.

You provide scholarship amounts in increments of r dollars and s dollars. All decisions of
the committee concerning scholarship amounts shall be a majority vote of the selection
committee. The number of scholarships you each year and the amount of each
scholarship will vary depending on the amount of funds available to be distributed. You
are required to annually distribute the greater of the net income of the trust or the amount

Letter 4792 (10-2012)
Catalog Number 58263T

2

that must be distributed to satisfy Code Section 4942 of the Internal Revenue Code.
Each year you advise the scholarship advisory committee of the amount of funds
available to be awarded as scholarships.

You advertise the scholarships with the school principal. The principal communicates the
availability of the scholarships to parents both through written communication and
verbally.

The members of your scholarship advisory committee review the scholarship applications
and rank the applicants based on grade-point-average (GPA) and financial need. In
order to be eligible for your scholarship, students must be in need of financial assistance
and have at least a 3.0 GPA. The scholarship advisory committee then submits its
selections to the trustees. The trustees are the pastor of the church and the school
principal. The trustees then make the final selection. 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.

Your scholarship is renewable and may be awarded more than once to deserving
students, who continue to meet the qualifications.

You pay scholarship proceeds directly to the school the student will be attending. You
provide a letter to the school specifying that the school’s acceptance of the funds
constitutes their agreement to refund any unused portion of the scholarship if a
scholarship recipient fails to meet any term or condition of the scholarship. The school
will also notify you if the scholarship recipient fails to meet any term or condition of the
scholarship. If the school does 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 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.

Letter 4792 (10-2012)
Catalog Number 58263T

• 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:

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