Foundation's revised scholarship procedures receive advance approval

Plain-English summary

A private foundation revised a scholarship program after its partner's afterschool program transitioned to a public charter school. Scholarships would cover demonstrated gaps in post-secondary educational expenses for eligible charter-school students. Eligibility and award amounts depended on financial need, academic standing, seniority, and objective funding rules, with related parties excluded. The foundation would monitor enrollment and performance, pay schools and vendors directly when practical, and seek recovery of misused funds. The IRS approved the procedures under section 4945(g)(1), so compliant scholarship expenditures would not be taxable expenditures and qualified awards would not be taxable to recipients.

Ruling snapshot

• Question: Do the foundation's revised need-based scholarship procedures satisfy the advance-approval requirements for grants to individuals?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201527049
Release Date: 7/2/2015 Employer Identification Number:
Date: April 7, 2015

Contact person - ID number:

Contact telephone number:

UIL 4945.04-04
LEGEND
X = Program
Y = Charter School Name
Z= Program Name
b dollars = Amount

Dear

You received advance approval for your grant making program on March 14, 2002; under
this program you made qualifying distributions under Section 4945(g)(1). You are
modifying your grant-making program and are now requesting advance approval of your
revised grant making procedures. 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 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 X.

You were formed to promote healthy well-being, education, and pre- career development
of urban at-risk youth or those needing a special boost. The purpose of X is to advance
your charitable and educational purposes by promoting post-secondary education for at-
risk urban youth by providing need-based post-secondary educational scholarships for
students of Y, a public charter school, exempt under Section 501(c)(3). The scholarships
are solely for expenses related to attending an accredited four year college, university,

Letter 4792 (10-2012)
Catalog Number 58263T

community college or vocational school that is described in 170(b)(1)(A)(ii); funding will
be provided only for tuition and fees, required books, housing, meal plans, pre-approved
educational supplies, and pre-approved travel directly related to attendance at the school
and for only amounts not paid for by financial aid; it does not cover the amount of the
Expected Family Contribution (EFC) per federal student aid packages.

Since 2002, you have been providing scholarships to children who successfully
completed an after school program conducted by W. The afterschool program was a
rigorous program of mentoring, community service, academic coaching, and other
enrichment programs designed to supplement the academic experiences that participants
had in their regular primary or secondary school; students were selected from among fifth
graders from the poorest performing schools in the area and were required to stay in the
program through high school. Participants who successfully remained in the program
were awarded a scholarship by you.

W is transitioning to Y, a public charter school exempt under Section 501(c)(3) to
increase the number of students who could participate in the programming and to further
increase the success of students. With the opening of the charter school, no new fifth
grade students were accepted into W’s program and soon all the students in the program
will have graduated high school. Y assumed the same responsibilities of W and serves
students from socio-economically disadvantaged communities; it also provides
mandatory enrichment programs which are closely monitored in addition to attendance
during regular classroom instruction. Over 75% of Y’s students qualify for free and
reduced lunch. It is this pool of students who will be eligible to receive a scholarship grant
through your program.

You operate Z, which is a program you operate as a complement to X. Through Z, you
partner with students at Y to provide financial aid advice, student coaches and other
types of mentoring. Z is a key component to fulfilling your mission.

Beginning in eleventh grade, your programs are discussed at school events, and planned
and sponsored events; in addition, Z personnel work with the school’s director of college
and career counseling to guide families through the financial aid process. X is discussed
in that context in connection with any gap that is identified, which occurs in the spring of
the senior year when students have received their college acceptances and have
information about available funding from their colleges and financial aid.

To be eligible, students must:

• Earn a GPA of a 2.0 or higher each term;

• Apply for all relevant financial aid opportunities, including, but not limited to Free
Application for Federal Student Aid (FAFSA), College Scholarship Service (CSS)
Profile, Board of Governors Grant (BOGG) Fee Waiver, work-study, loans, and a
minimum of two scholarship applications outside of the institution they are
attending;

Letter 4792 (10-2012)
Catalog Number 58263T

• Submit financial aid award letters, a copy of the Student Aid Report, and proof of
scholarship applications;

• Eligible students must enter into a scholarship agreement; pursuant to this
agreement, eligible students must agree to attend a Z college orientation and Z's
summer program, agree to apply for various forms of financial aid, agree to work
with a Z college coach as well as attend other workshops and meetings as
assigned by Z.

All students who meet the eligibility requirements described above and have
demonstrated financial need are eligible for a scholarship.

The number of grants made each year depends solely on the number of students who
meet eligibility requirements and have demonstrated financial need; the amount of the
grants are limited to per student maximum which is currently set at b dollars per year for
up to six years of post-secondary education. This may be further reduced in any year if
your resources do not permit full funding for all recipients. Subject to the cap previously
described, the amount of each scholarship for each academic term is determined based
on the following formula: Eligible Educational Expenses less other available funding is the
tentative scholarship amount. Your scholarships are designed to fund the gap which is
referred to as eligible need.

There is generally no selection committee. Although your employees are responsible for
determining the satisfaction of the requirements for eligibility and renewal, those are
objective determinants that do not involve any meaningful degree of discretion, nor are
those foundation employees in a position to receive private benefit directly or indirectly if
certain potential recipients are determined to be eligible for a scholarship over others.

If the combined eligible need of all eligible individuals in any given year exceeds your
available annual funding, the available funding would be divided among the eligible
individuals according to the following hierarchy:

a. Funding will be made available to eligible seniors (i.e. students who are closest to
completing their degrees).

b. If available funding permits, each eligible senior would receive funding in the full
amount of his or her eligible need.

c. If all senior scholarships had been satisfied, your remaining funding would then be
distributed to satisfy the eligible need of eligible students in the Junior Class.
Then, if funds remained, the sophomore class would be funded. Then, if funds
remained, the freshman class would be funded.

d. When a class level is reached for which there will be inadequate funding available
for all of the Eligible Needs, funds will be distributed to the students in that class
based upon their cumulative GPAs, ranked from highest to lowest. Thus, the
student with the highest GPA would receive funding in the full amount of his or her
Eligible Need (assuming you have at least that amount available); and so on
through GPA ranking, until the available funds are depleted.

Letter 4792 (10-2012)
Catalog Number 58263T

In such years as the combined recipient need does not exceed the available annual
funding, there shall not be a Selection Committee. The scholarship distribution approach
is objective and ensures unbiased administration, as it is based solely on seniority and
GPA, which are readily available and verifiable through student transcripts.

However, in such years when the combined recipient need is greater than the available
annual funding, a selection committee will act to ensure that the distribution of funds is
administered in an objective, unbiased way. The Selection Committee members will be
the three individuals then holding the positions of your Managing Director, Director of Z,
and Z’s Lead College Coach.

Your Related Party Policy prohibits scholarships to be awarded to “family members” or
“relatives” of the Selection Committee, officers, directors and substantial contributors,
among other persons. “Family members” include an individual’s spouse, ancestors,
children, grandchildren, great grandchildren, and the spouses of children, grandchildren,
and great grandchildren. “Relatives” include “family members” as well as any other
persons who are related to such individual by blood, adoption, marriage, and to whom it
is reasonable to cause such individual to abstain from the determination process to
ensure objectivity. Individuals are not permitted to participate in the determination of a
scholarship award, including decisions regarding the amount or renewal thereof, to a
relative.

During the period the scholarship is being administered, students are required to provide
you with transcripts, course schedules and a course plan for graduation. Each student is
required to meet with his or her assigned Z college coach at least monthly to review the
student’s progress and discuss the student's courses and grades.

Primarily, you will pay the grants directly to an educational institution, which complies with
Internal Revenue Code section 170(b)(1)(A)(ii), for application directly to the student's
tuition, student fees and on-campus room and board, if the student satisfies the
educational institution’s standards for current enrollment. Further policies include the
following:

• Payments for off-campus housing will be made directly to the property
management office or landlord.

• You will establish a book account to which the students will be able to charge their
books. When the book account is not available or does not supply a student's
books, students may obtain approval to purchase their books and then submit the
appropriate receipts to you for approval and reimbursement.

• Qualifying school supplies are reimbursable only when they are pre-approved.

• School-related travel expenses will only be paid in accordance with a budget
submitted annually and based on the most economical options available. Receipts
are required for any such expenses that you advance or reimburse.

Performance will be monitored under the following procedures:

Letter 4792 (10-2012)
Catalog Number 58263T

a. Scholarship recipients will be placed on probation for one term when GPAs are
lower than 2.0; for earning units less than full-time in an academic term; and for
not communicating with the Z college coach;

b. Recipients who remain on probation for two consecutive terms will be placed on a
Probationary Contract;

c. Recipients who are on probation for three cumulative terms will be placed on a
Probationary Contract;

d. Recipients who do not fulfill the terms of their Probationary Contract may be
placed on a Dismissal Contract and/ or may have funding reduced or terminated;
and,

e. Recipients who choose not to return to school after two consecutive semesters
without taking classes will be considered to have voluntarily terminated their
participation in the scholarship program.

You will ensure that scholarship disbursements are related to the educational purpose of
the grant and, if not sufficiently related, will decline to pay the expense or reimburse the
expenditures.

In the event that funds are misused, the steps you take to seek recovery of misused
funds will depend upon the payee of those funds, the amount involved and other relevant
circumstances. In all cases, you will contact the payee in writing at the most recent email
or mailing address and demand prompt return of the misused funds.

If the payee of the misused funds is a student, who remained part of Z on a probationary
basis, the student’s Z college coach and the Z Director would meet with the student to
discuss a payment plan for restoration of the misused funds. Given the typical age,
financial profile of the students, and the modest amounts of any advances you might
make to students, you do not expect to pursue legal action against a student payee who
misused funds, as it is not likely that legal action would result in execution of a judgment.

If the payee of the misused funds is a third party vendor, including an educational
organization, landlord, or other vendor, in addition to sending one or more written
requests for return of the misused funds, you may pursue legal recourse if the
significance of the amount warranted it, and you believe there is a reasonable probability
that legal action would result in execution of judgment against the third party vendor.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

• 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.

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 questions, please contact the person listed at the top of this letter.

Sincerely,

Director, Exempt Organizations

Letter 4792 (10-2012)
Catalog Number 58263T