Scholarship and internship grant procedures receive advance approval

Plain-English summary

A private foundation proposed a four-year program for graduating high school seniors who were unlikely to receive enough assistance from conventional sources. Awards would supplement other financial aid and combine post-secondary education support with at least two summer internships at local nonprofit organizations or government agencies. Applicants would be evaluated using academic performance, financial need, community involvement, leadership potential, recommendations, essays, and an interview. Disqualified persons and relatives of foundation or selection-committee insiders were ineligible, and recipients had to meet academic, financial, reporting, and internship requirements for renewal. The IRS approved the procedures under section 4945(g)(1), so grants made under the approved program would not be taxable expenditures.

Ruling snapshot

• Question: Did the foundation's proposed scholarship and nonprofit internship procedures satisfy the advance-approval rules for grants to individuals?
• Outcome: Approved, assuming the program is conducted as proposed.
• Key authorities: IRC §§ 117(a), 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: 201521020
Release Date: 5/22/2015 Employer Identification Number:

Date: February 26, 2015
Contact person - ID number:

Contact telephone number:

LEGEND: UIL:
X= program 4945.04-04
Y= state
z= dollar amount

Dear

You asked for advance approval of your educational grant procedures under Internal
Revenue Code sections 4945(g). This approval is required because you are a private
foundation that is exempt from federal income tax.

Our determination

We approved your procedures for awarding educational grants. Based on the information
you submitted, and assuming you will conduct your program as proposed, we determined
that your procedures for awarding educational grants meet the requirements of Code
sections 4945(g)(1). As a result, expenditures you make under these procedures won't
be taxable.

Description of your request

You will operate an educational grant program called X. X will enable capable and
qualified Y graduating high school seniors to advance themselves through education and
to participate in mentorships with Y nonprofit organizations or governmental agencies. X
is primarily intended to aid students who are unlikely to receive sufficient assistance from
conventional sources. Upon completion of high school, recipients will receive their award
to pursue post-secondary education. In addition, recipients are required to work summer
internships from local nonprofit organizations or governmental agencies for at least two
summers. Working summer internship is one of the renewal requirements under X.

X is a four-year supplemental award program intended to cover the unmet needs of the
student. The amount, allocation and utilization of the award will be determined after all
other financial aid resources and expected family contributions have been applied. You
currently plan to provide each recipient z dollars per year during their four years of
college. X is intended to provide awards to individuals who show promise of benefiting
significantly from the education and who can be expected to become more useful citizens
with special attention to identify those who are not likely to obtain the assistance from
convention sources. The amount for each award is z dollars for all recipients with
allocations and designations between scholarships and internships based on individual
circumstances and needs.

You will make the existence of X known by communicating it to school officials, students,
school counselors/teachers/administrators and local nonprofits. You may also publicize
through the internet and social media. Potential recipients complete an application
including information about their background and family, academic achievement,
extracurricular activities, community service involvement, educational and career goals, a
personal statement explaining how they meet the leadership criteria and three letters of
recommendation.

To be eligible to apply, an applicant:

(a) Must have attended (and graduated from) a high school or other secondary school
in the State of M;

(b) Must have been admitted to an accredited and qualifying institution;

(c) Must not be related to any director or manager of or substantial contributor to you,
be employed by any business of which any such person is a significant owner, or
be a descendant of such an employee or to any other person who could be
designated as a disqualified person; and

(d) Must have submitted to you a completed application

Recipients are selected based on the following criteria:

(a) Must be at least a high school senior, on track to graduate, with a minimum
cumulative and current Grade Point Average anticipated to be at least 3.5;

(b) Must submit ACT or SAT scores as one factor to be weighed in judging academic
excellence;

(c) A record of community involvement to demonstrate leadership potential and
commitment to the Y community;

(d) Involved in meaningful participation in extracurricular activities;

(e) Must submit a completed application along with academic transcripts, letters of
recommendation, student essays, parental income verification and a college
financial aid award letter; and

(f) Personal interview on recipients motivation, character, ability and potential.

Requirements and conditions to maintain and qualify for renewal include:
(a) Must be enrolled full time;
(b) Remain in good academic standing with verification from the college;
(c) Must demonstrate satisfactory academic progress;
(d) Showing continued financial eligibility;
(e) Maintain required communications with your staff;
(f) All financial aspects are properly accounted for;
(g) A narrative report at the conclusion of every semester; and

Letter 4779 (10-2012)
Catalog Number 58222Y

(h) Participate in at least two summer internships with a narrative report at the
conclusion of their internship, which includes an assessment of the experience
and accomplishments.

Awards will be disbursed to the academic institutions, paid to the organizations where the
recipients perform the internships or paid to the recipients directly. Any awards made
directly to the recipients will require a report with receipts.

You will take all reasonable steps to recover any funds that the grant recipient has used
for improper purpose.

Your Selection Committee will be appointed by you and should consist of two or more
qualified persons. The Committee will vary from year to year and will consist of
individuals whose families are ineligible to receive grants under X. The Committee has
the sole authority to award X. Relatives of members of your Committee, or your officers,
directors or substantial contributors are not eligible for the 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

Letter 4779 (10-2012)
Catalog Number 58222Y

• 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.

We've sent a copy of this letter to your representative as indicated in your power of
attorney.

Please keep a copy of this letter in your records.

If you have any questions, please contact the person listed at the top of this letter.

Sincerely,

Director, Exempt Organizations

Letter 4779 (10-2012)
Catalog Number 58222Y