Entrepreneurship scholarships receive advance approval

Plain-English summary

A private foundation sought advance approval for scholarships for school-district seniors who showed entrepreneurial drive and planned higher education within the named state. Applicants submitted an essay or short video and were evaluated on goals, self-motivation, character, entrepreneurial vision, and overcoming hardship. School-level committees first narrowed the field, then a volunteer review committee scored and interviewed finalists, with members required to recuse when they knew an applicant. Awards were one-time, tuition-only grants paid directly to schools, and recipients had to report on their studies, activities, and goals. The IRS approved the procedures under section 4945(g)(1), subject to the stated supervision, recovery, and recordkeeping safeguards.

Ruling snapshot

• Question: Do the entrepreneurship scholarship selection and supervision procedures qualify for advance approval?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 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: 201509047 Employer Identification Number:
Release Date: 2/27/2015
Date: 12/1/2014

Contact person - ID number:

Contact telephone number:

LEGEND

UIL: 4945.04-04

B= Name of Scholarship Program
C= Name of School District

D= State

j= Number

k= Number

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 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 provided in Code section 117(b)).

Description of your request

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

Letter 4792 (10-2012)
Catalog Number 58263T

You will provide scholarships to high school seniors of C who demonstrate a strong
entrepreneurial spirit and are interested in obtaining a higher education in the state of D
to enhance his or her entrepreneurial opportunities.

You will award between j to k number of scholarships per year in the range of $m to $n
dollars each.

Your criteria for selecting the scholarship recipients will be as follows:
• High school senior from C
• Planning to attend a college or vocational school in D

In addition to the requirements listed above, scholarships will be granted to applicants
exhibiting exemplary levels of the following criteria:
• Applicant should be goal-oriented, self-motivated, exemplifying an entrepreneurial
spirit, possess a clear vision of what he or she desires for his or her future, and
display passion, integrity, innovation, accountability, and other character traits that
you hold in high regard
• Applicant can demonstrate that he or she has encountered and overcome some
sort of hardship such as personal or family illness, high-risk or criminal parental
behaviors, loss of a loved one, etc.

The applicants will be asked to submit an essay or video no longer than three minutes,
describing what being an entrepreneur means to him or her and how he or she will use
entrepreneurship to achieve his or her dream for the future.

You will publicize the scholarship in the following ways:
• Emails to all high school seniors in the school district and their parents
• Postings on the school district schools’ websites
• Announcements in school district newsletters
• Posters in school district schools

The screening and selection process to determine recipients is as follows:

• Screening committees at each high school will perform an initial review to find ten
applicants from their high school that best fits your criteria. Each committee is
composed of two divisions: one is composed of community volunteers who do not
have close knowledge of the students, and the second group is composed of
teachers and administrators from the high school. The community volunteers give
each application a score based on the scholarship criteria. This score is then
used by the high school staff division of the committee to narrow down
applications before arriving at a group consensus on the finalists.

• Your scholarship review committee, comprised of six to eight year-round
volunteers, will read and fill out a score card for each of the remaining
applications. Committee members are asked to recuse themselves from scoring
an applicant if they happen to know the person being scored. Based on the score

Letter 4792 (10-2012)
Catalog Number 58263T

cards, you will extend an interview to the top six to eight candidates. Interviews
with finalists are scheduled through the school district scholarship coordinator.
Your review committee then meets with each finalist to ask them pre-scripted
questions. Based on the interviews, one to five applicants will be selected as
recipients of the scholarship award; the size of the award will depend on the
number of recipients.

Scholarships will be provided to recipients as one-time grants paid directly to the higher
educational institution the recipient chooses to attend, under an arrangement whereby
the school will apply the grant funds toward tuition fees only for enrolled students who are
in good standing.

The scholarship recipient will be required to provide a report to you upon the conclusion
of the school year during which the grant was administered. The report will describe the
studies the recipients have pursued during the past year, a description of any
extracurricular activities participated in, and a reflection on the goals that had originally
been articulated in their scholarship application.

You represented that you will investigate diversions of funds from their intended
purposes, take all reasonable and appropriate steps to recover diverted funds, 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 recipients will take extraordinary precautions to prevent
future diversions from occurring.

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
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).

Letter 4792 (10-2012)
Catalog Number 58263T

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