Law student scholarship procedures receive advance approval

Plain-English summary

A private foundation sought advance approval for scholarships benefiting senior law students in one state. A state agency publicized the program, ranked applicants using academic promise and financial need, and recommended award amounts, while the foundation made the final decisions. Awards went directly to the recipient's school and continued each semester only if the student remained enrolled, attended classes, and maintained passing grades. The foundation also committed to reports, recordkeeping, investigation of diverted funds, and recovery or withholding measures. The IRS approved the procedures under section 4945(g)(1), so complying awards would not be taxable expenditures and could be excluded by recipients when used for qualified tuition and related expenses within section 117(b).

Ruling snapshot

• Question: Do the scholarship selection, payment, and supervision procedures qualify for advance approval?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 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: 201509052
Release Date: 2/27/2015 Employer Identification Number:
Date: 12/1/2014

Contact person - ID number:

Contact telephone number:

LEGEND

UIL: 4945.04-04

X= 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 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 scholarship grants to senior law students within the state of X who meet the
criteria set forth in your trust agreement to attend the law school of one of the universities
located in the state of X. The applicants are ranked according to a combination of
academic promise (as determined by college grade point average) and financial need (as
determined by analysis of the information presented on the federally approved need
analysis form). The applicant(s) with the highest ranking will be awarded the
scholarship(s).

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

Letter 4792 (10-2012)
Catalog Number 58263T

You use a state agency that helps students pay for postsecondary education and training
as your vendor. Your vendor advertises the scholarship on their website.

Students who have satisfactorily completed their junior year of law school are eligible to
apply. Each year you advise the vendor of the amount of funds available to be awarded
for scholarships. The vendor reviews the applications and ranks the applicants according
to a combination of academic promise and financial need. The applicants with the highest
ranking are awarded the scholarship. Receipt or potential receipt of other scholarships or
student financial aid may be considered in the selection process. The vendor reviews the
applicants 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.
All scholarships are awarded on an objective and non-discriminatory basis. No
scholarships may be awarded to any disqualified person as defined in Code Section
4946.

The scholarships are a one-time award, renewable each semester if the student remains
in school, attends all classes, maintains a passing grade in all subjects of each semester,
all of which must be verified by the school so attended.

Each academic term or semester the vendor pays the scholarship proceeds directly to
the university/college the recipient attends. Upon verification of registration as full-time
student, scholarship monies are applied for the benefit of the student. If a student fails to
complete a term or semester, monies are returned to the Scholarship Fund.

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

You represent that 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 July 15, 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