Public high school scholarship procedures receive approval

Plain-English summary

A private foundation sought approval for renewable scholarships benefiting graduating seniors at a public high school. The school principal would recommend students without a separate application, and a committee would rank them using grade-point average, citizenship, moral character, and likelihood of college success. Awards would be paid directly to accredited colleges, universities, technical schools, or vocational schools, with reporting and recovery procedures for any diverted funds. Disqualified persons could not receive scholarships, and the foundation would retain selection and monitoring records. The IRS approved the procedures under section 4945(g)(1), so qualifying 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 foundation's selection, payment, renewal, and monitoring procedures qualify for advance approval of its scholarship program?
• 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: 201509056
Release Date: 2/27/2015
Date: 12/2/2014 Employer Identification Number:

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

X= Place

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 to achieve your purpose of enhancing access to
higher education. Your program’s purpose is to provide scholarships to deserving
graduating high school students of the public high school in X. 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 so the number of scholarships and the amounts
will vary depending on the amount of funds available to be distributed. In addition, all
scholarships are awarded on an objective and non-discriminatory basis and no
scholarship may be awarded to any disqualified person as defined in Code Section 4946.

Letter 4792 (10-2012)
Catalog Number 58263T

Eligible candidates will be seniors at X high school who have demonstrated good
citizenship and moral principles. You will not consider any students, who have citizenship
issues, school code issues, or honor code violations. Financial aid will not be a pre-
requisite for being a recipient of an award. The scholarships are renewable as long as the
students are in good standing and continuing their college, university, or post-graduate
studies.

There is no application process. The principal of X high school recommends deserving,
outstanding students to members of the awarding committee, which consists of the
superintendent of the city of X, the principal of X high school, and a member nominated
by your trustee, who is currently the school counselor from X high school.

Each year the trustee advises the awarding committee of the amount of funds available
to be awarded as scholarships. The committee ranks all students on grade-point-average
(GPA), good citizenship and moral character; the committee also considers those who
are most likely to succeed in college.

The awarding committee must provide the meeting minutes to you in which they outline
the guidelines/criteria used to select scholarship recipients; these would only have to be
provided once. The awarding committee must also annually provide you the signed
minutes of the committee meeting and a list of all names, addresses and last four digits
of each recipient's social security number, and the amount of each award. They must
also sign and return to you a copy of your conflict of interest policy

Once you approve the list, you will send a congratulatory letter to the recipients and ask
them to provide the name of the school they are attending. Each recipient may select
any fully accredited college, or university or technical or vocational school beyond the
high school level. The scholarships are also announced at the Senior Award night.

The trustee pays the scholarship proceeds directly to the school the recipient attends for
the benefit of the recipient and provides a letter to each school specifying that their
acceptance to the funds constitutes their agreement to (i) refund an unused portion of the
scholarship if the scholarship recipient fails to meet any term or condition of the
scholarship (ii) notify the trustee if the scholarship recipient fails to meet any term or
condition of the scholarship. If the school will not agree to such terms the trustee will
obtain the needed reports and grade transcripts from the scholarship recipient.

You will arrange to receive and review grantee reports annually and upon completion of
the purpose for which the grant was awarded and investigate diversions of funds from
their intended purpose as well as take all reasonable and appropriate steps to recover
diverted funds, ensure other grants funds held by the grantee are used for their intended
purposes, and withhold further payments to grantee until you obtain grantees assurances
that future diversions will not occur and the grantees will take extraordinary precautions
to prevent future diversions from occurring.

Letter 4792 (10-2012)
Catalog Number 58263T

You will maintain all records relating to individual grants, including information obtained to
evaluate grantees, identify whether grantee is a disqualified person, establish the amount
and purpose of each grant, and establish that you under took 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 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).

• 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