In-state undergraduate scholarships receive approval

Plain-English summary

A private foundation sought advance approval for need-based undergraduate scholarships for graduates of public high schools in three named cities. Recipients had to attend an accredited Protestant or nonsectarian college or university within the state, could not attend a school devoted mainly to business principles, and had to meet the program's religious-training, financial-need, and academic criteria. Awards were nonrenewable, committee members and other insiders were ineligible, and payments went directly to the recipient's school. Schools had to refund unused funds and report failures to meet scholarship conditions, or the recipient had to provide reports and transcripts. The IRS approved the procedures under section 4945(g)(1), subject to annual reporting, diversion recovery, withholding, and recordkeeping safeguards.

Ruling snapshot

• Question: Do the in-state undergraduate scholarship procedures qualify for advance approval?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4942, and 4945(g)(1)

Full text (IRS public release)

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

Release Number: 201509046
Release Date: 2/27/2015 Employer Identification Number:
Date: 12/1/2014

Contact person - ID number:

Contact telephone number:

LEGEND

UIL: 4945-04.04

W = Name of City
X = Name of City
Y = Name of City
Z = Name of State
m dollars= Amount
n 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 public high schools located in
W, X, or Y in the state of Z, and who need financial assistance in pursuing a course of
instruction leading to an undergraduate degree in a Protestant or nonsectarian accredited
college or university operated within the state of Z.

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. Based on your current financial
projections, the amount of each scholarship you award will generally range from $m to $n
dollars.

Scholarship eligibility and selection criteria are as follows:

• Must be a graduate of a public high school located in W, X or Y
• Must attend a Protestant or non-sectarian college or university in Z
• Must not attend an institution whose course of instruction is entirely or primarily
devoted to the study of business principles

• Has received Protestant religious training in the home and/or formally affiliated
with a church of Protestant denomination

• Have financial need

• Grade point average consideration

Your scholarship committee reviews the scholarship applications and makes a
recommendation to you regarding the amount that should be awarded to each applicant.
You make the final determination as to the amount awarded. Your scholarships are non-
renewable. Members of your scholarship committee, your officers, directors, or
substantial contributors and their relatives are not eligible for awards made under your
scholarship program.

You pay the scholarship proceeds directly to the university/college the recipient attends
for the benefit of the recipient. You provide a letter to each university/college specifying
that the university/college’s acceptance of the funds constitutes the university/college’s
agreement to (1) refund any unused portion of the scholarship if a scholarship recipient
fails to meet any term or condition of the scholarship, and (2) notify you if the scholarship
recipient fails to meet any term or condition of the scholarship. If the university/school will
not agree to such terms you will obtain the needed reports and grade transcripts from the
scholarship recipient.

You represent that 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.

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

Letter 4792 (10-2012)
Catalog Number 58263T

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.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

Sincerely,

Director, Exempt Organizations

Letter 4792 (10-2012)
Catalog Number 58263T