County scholarship procedures receive advance approval

Plain-English summary

A private foundation sought approval for scholarships supporting post-high-school education for students from a county high school, with possible expansion to other schools and home-schooled students. The initial awards included renewable four-year scholarships in engineering, liberal arts, or performing arts and a renewable two-year vocational scholarship. Applicants had to meet academic and school criteria, submit transcripts and references, and be accepted by an accredited institution. A committee would consider intended study, academic potential, activities, leadership, maturity, and other available awards, while excluding disqualified persons and close relatives of applicants. The IRS approved the selection, payment, renewal, reporting, and fund-recovery procedures under section 4945(g)(1).

Ruling snapshot

• Question: Do the foundation's application, selection, renewal, and monitoring procedures qualify for advance approval of its county scholarship program?
• 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: 201509055
Release Date: 2/27/2015 Employer Identification Number:
Date: 12/2/2014

Contact person - ID number:

Contact telephone number:

LEGEND 4945-04.04

R= County

S= High School
T= City

U= State

z dollars = Amount
b= Number

c= Number

d= Number

e= Grade

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 in Code section 117(b)).

Description of your request

You are operating a scholarship program. You have a goal of improving the quality of life
in R. You will provide scholarships to graduates of S for post-high school education at
accredited institutions.

Letter 4792 (10-2012)
Catalog Number 58263T

The amount and number of each award is determined annually and based on your
available resources as determined by your board. The amount of the annual award is the
same for all scholarships. Initially, you will provide a total of b scholarships to graduating
seniors of S in T for the amount of z dollars; c of these scholarships are renewable for up
to d years and are to be used to pursue a four year degree in engineering or in a major of
liberal arts or the performing arts. The remaining scholarship is renewable for a second
year and is to be used to pursue a two year degree in a trade or vocational area of study.
The required areas of study may change from time to time as you determine the best
interests of the community and matching your emphasis.

You anticipate expanding your program to each high school located in R and perhaps
others in the surrounding area. It could also be expanded to home-schooled students
who are attaining the equivalent of a high school diploma and intend to continue their
education at an accredited institution.

You will publicize the scholarship program with the high schools that it is offered,
generally with the cooperation of each school’s guidance department. Schools are
required to list the availability of the scholarships and the application process in the same
manner that it publicizes other community-based scholarships so that the process is
public and open to all who desire to apply. As the program expands beyond one school,
it is anticipated that news releases to local print and electronic media will be used.

Individuals applying for a scholarship must meet the following eligibility criteria:
• Applicants must be graduating seniors from S.

• Applicants must have a minimum high school grade point average of e at the time
of the application.

• Applicants must show acceptance in an accredited U Institute of higher learning
intending to major in one of the following: (i) Education, Mathematics, the Sciences
or Liberal Arts Bachelor Degree program; (ii) Engineering (civil, chemical,
electrical, or Information Technology) Bachelor Degree program; (iii) Two year
vocational degree program.

Applicants must complete a detailed application and may submit the application and
supporting materials either by email to you or in hard copy to you by a certain date.
Applicants must include a current high school transcript, two letters of reference from
non-family members who know them well, and proof of acceptance in a qualifying
institution of higher learning; if not yet accepted, the applicant may include proof of
application and the expected date by which the applicant expects to receive a
determination of acceptance.

Your board of directors selects the scholarship committee and currently consists of your
board members and the R high school principle. Once you have gained operational
experience in the scholarship process, it is anticipated that not all of your directors will be
on the committee and that other outside committee members will be chosen by your
board based on their familiarity with local schools, higher education requirements, and
leadership in the community. No person may serve on the committee who is a

Letter 4792 (10-2012)
Catalog Number 58263T

3

“disqualified person” or related within the third degree of consanguinity to any applicant.
The process is intended to be and the board shall assure that the selection process will
be: (a) fairly administered, (b) open to all regardless of race, sex, creed, national origin,
marital status, and(c) in compliance with the Internal Revenue Code and Regulations.
Your directors, officers, employees, and scholarship committee members and their family
members and other disqualified persons as defined in Section 4946 are ineligible for
awards while that status is maintained and for two years after termination of that status.

When evaluating applicants, you first look to the intended major area of study. You also
use: (a) grade transcripts to help determine the potential for success in post-high school
education, (b) history of extracurricular activities that evidence work ethic and leadership
skills, (c) recommendation letters submitted with the application that support these two
criteria as well as general social maturity of the applicant, and (d) to the extent known,
other awards or resources available to the applicant. You do not focus on the highest
ranking students; rather, you believe that those who are in the upper half of their class
are likely to be successful but may often be overlooked in other scholarship awards that
focus solely on grade point average. It is your goal to encourage good students to
continue their education by helping to alleviate the financial burden. If an applicant is
known to have received other scholarship awards, you will consider that in determining
the successful recipient.

You will pay scholarship funds directly to recipient's educational institution for qualified
education expenditures including tuition, fees, and course related expenses such as
books, supplies, and equipment as allowed by the Internal Revenue Code and
Regulations.

Each recipient is required to provide a grade transcript at the completion of each term
showing that they completed the term and met the grade requirements. The applicant
must also submit a class schedule or tuition receipt for the next term in order to continue
to receive the scholarship funds. Your secretary is responsible for collecting and
reviewing this information. Any recipient who does not meet the requirements will be
contacted and if the information is not received or suitable alternative arrangements for
complying are not made, then you will be advised and you shall have the final
determination whether to terminate the remaining portion of the scholarship.

You have the following criteria in place for a renewal of the scholarship:

• The remaining installments are subject to forfeiture if the recipient is no longer
enrolled in the approved course of study at an accredited U institution or
does not meet the minimum GPA requirements.

• Recipients must maintain a minimum GPA in the major course of study of 3.2 on
a 4.0 scale and an overall GPA equivalent to 3.0 on a 4.0 scale by the end of
each academic year. Recipients will provide a grade transcript to you.

• Recipients may request you approve a leave of up to one year from the course
of study which may be granted at your sole discretion.

• You reserve the sole right and discretion to interpret and/or modify these
conditions or to resolve any issues not specifically covered.

You maintain case histories showing recipients of your scholarships including names,
addresses, purposes of awards, amount of each grant and manner of selection.

Letter 4792 (10-2012)
Catalog Number 58263T

You will arrange to receive and review grantee reports annually and upon completion of
the purpose for which the grant was awarded, investigate any diversions of funds from
their intended purposes, and take all reasonable and appropriate steps to recover
diverted funds, 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 grantees will take extraordinary
precautions to prevent future diversions from occurring.

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 may report any significant changes to your program by
completing Form 8940 and sending it 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).

Letter 4792 (10-2012)
Catalog Number 58263T

5

• 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