Need-based high school scholarships approved

Plain-English summary

A private foundation proposed need-based scholarships for graduates of a specified public Title I high school. A committee of foundation leaders and school principals would rank applicants using financial information from the school-meals application. Awards would be paid directly to colleges each semester, require at least a 2.5 college grade-point average, and remain available during the four years after high school graduation, subject to a cumulative cap. The IRS approved the procedures under section 4945(g)(1), so compliant awards would not be taxable expenditures and could qualify for the section 117 exclusion when used for qualified tuition and related expenses.

Ruling snapshot

• Question: Do the foundation's proposed need-based scholarship procedures satisfy the advance-approval rules 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
P.O. Box 2508
Cincinnati, OH 45201

Department of the Treasury

Release Number: 201535020
Release Date: 8/28/2015
Date: June 2, 2015

Employer Identification Number:

Contact person - ID number:

Contact telephone number:

LEGEND

M= City, State

X= Scholarship Program
Y= School

x dollars = Amount

y dollars = Amount

z dollars = Amount

UIL: 4945.04-04

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 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 provide in Code section 117(b)).

Description of your request

Your purpose is to support education by augmenting and enhancing school activities,
providing tutoring support for school children, and providing college scholarships to
universities.

Letter 4792 (10-2012)
Catalog Number 58263T

2

You will operate a scholarship program called X. The purpose of the X is to provide
scholarships to high school graduates from Y, a public high school which is a Title I
school, located in M. Graduates of Y who attend college are eligible to receive the
scholarship, except for immediate family members of your employees, officers or
directors, or family members of your substantial contributors.

Scholarships will be awarded based on financial need. Applications are evaluated and
ranked by a selection committee consisting of your president, your executive director,
and the principals of the elementary, middle and high schools of Y. The selection
committee uses the financial information provided to the school in the Free and Reduced
Price School Meals Household Application in their selection process.

Scholarship recipients will receive x dollars per year, with y dollars payable upon
enrollment at college each semester, provided that the graduate maintains a grade point
average of at least 2.5 at the college. A cumulative maximum of z dollars may be
awarded to an individual graduate of Y under this program. Scholarships are only
available to graduates of Y in the four years following their high school graduation.

An applicant for the scholarship must authorize the college they are attending to
communicate directly with you to verify the scholarship recipient’s attendance and grade
point average. Scholarship recipients are required to direct their college to report their
grade point average to you each semester. You will pay funds directly to the college and
will investigate if a misuse of funds occurs.

You will retain all records submitted by the grantees and their educational institutions,
including information used to evaluate the qualifications of potential grantees,
identification of the grantees including any relationship of any grantee to you and whether
the grantee is a disqualified person, the amount and purpose of each grant, and all
reports and other follow up data obtained in administering your grant program.

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).

Letter 4792 (10-2012)
Catalog Number 58263T

3

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

• 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