County graduate scholarships receive advance approval

Plain-English summary

A private foundation sought advance approval for scholarships based on financial need for graduates of high schools in a named county. The program considered student ability, extracurricular activities, and financial need, with preference for students in their first two college years. Awards were nonrenewable, although prior recipients could apply again, and disqualified persons were ineligible. A management company advertised the program, paid schools directly, obtained notices of failures to meet scholarship conditions, and maintained detailed case histories. The IRS approved the procedures under section 4945(g)(1), subject to annual reporting, investigation and recovery of diverted funds, withholding safeguards, and grant records.

Ruling snapshot

• Question: Do the county graduate 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: 201509045
Release Date: 2/27/2015 Employer Identification Number:
Date: 12/1/2014

Contact person - ID number:

Contact telephone number:

LEGEND

UIL: 4945.04-04

M= County, State

N= City, State

P= Name of College

Q= County

R= Name of Organization
T= Name of Organization
v dollars= Amount

w dollars= 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 provided in Code section 117(b)).

Description of your request
You engage in charitable activities by enhancing access to higher education. You
provide scholarships to students who have graduated from a high school in M.

Letter 4792 (10-2012)
Catalog Number 58263T

The number of scholarships that you award 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
that must be distributed to satisfy Code Section 4942. The amount of each award is also
dependent on the financial need of the recipient including the recipient's parental income
and family resources. Scholarship awards currently range from $v to $w dollars each.

Applicants are chosen for a scholarship using the following criteria:

• Students who graduated from high school or secondary school in M
• Student ability

• Extra-curricular activities

• Financial need

• Preference given to students in their first two academic years of college

Your scholarships are non-renewable. However, past recipients may apply again for a
scholarship.

Your selection committee consists of the Superintendent of the Public School District in
N, the President or other Chief Executive Officer of P, the Superintendent of High School
Education for Q, a representative for Q to the Board of Directors of R and a
representative of the trustee of your organization.

T, your scholarship management company, advertises your scholarship program to the
public on its website. Your selection committee selects the recipients of scholarships. 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.

T pays the scholarship proceeds directly to the university/college the recipient attends for
the benefit of the recipient. T sends a letter to each university/college specifying that the
university/college’s acceptance of the funds constitutes the university/college’s
agreement to notify you if the scholarship recipient fails to meet any term or condition of
the scholarship. T maintains case histories showing recipients of your scholarships
including names, addresses, purposes of awards, amount of each grant, manner of
selection, and relationship (if any) to officers, trustees, or donors.

You will (1) arrange to receive and review recipient 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 also ensure other grant funds held by a recipient are used for their intended
purposes, and withhold further payments to recipients until you obtain recipients’
assurances that future diversions will not occur and that the recipients will take
extraordinary precautions to prevent future diversions.

Letter 4792 (10-2012)
Catalog Number 58263T

You represent that you will maintain all records relating to individual grants, including
information obtained to evaluate recipients, identify whether a recipient 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.

• 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.

Letter 4792 (10-2012)
Catalog Number 58263T

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