Scholarship procedures for nontraditional students approved

Plain-English summary

A private foundation proposed scholarships for traditional and nontraditional students, including participants in registered apprenticeship programs. Applicants would be evaluated on their education plans, personal essays, motivation, financial need, recommendations, academic experience, aptitude tests, and character. The program included renewal standards, reporting requirements, conflict-of-interest protections, and procedures for recovering diverted funds. The IRS approved the award procedures under section 4945(g)(1), so expenditures made under those procedures would not be taxable expenditures. Scholarship amounts used for qualified tuition and related expenses also could be excluded from recipients' income under section 117, subject to that section's limitations.

Ruling snapshot

• Question: Whether the foundation's scholarship procedures met section 4945(g)(1)
• Outcome: Approved
• Key authorities: I.R.C. §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), 4946(a)

Full text (IRS public release)

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

Release Number: 201539034
Release Date: 9/25/2015 Employer Identification Number:
Date: June 29, 2015

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
B = Region Name
C= State Name

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 provided in Code section 117(b)).

Description of your request

Your letter indicates you are operating a scholarship program which holds and
administers a fund that provides scholarship grants to individuals who reside in the
United States (with an emphasis on the B particularly those in the state of C to enable
such individuals to complete a high school, undergraduate, graduate or technical school
education in the field of their choice at any accredited school they have selected in the
United States. In the case of apprenticeship programs, scholarships will be provided for
the organized, related instruction in technical subjects required for apprenticeship
programs that are registered by the U.S. Department of Labor, Office of Apprenticeship,
offered by an institution that meets the criteria described in section 170(b)(1)(A)(ii) of the
Code. Your scholarship program is intended to enable highly motivated individuals with

Letter 4792 (10-2012)
Catalog Number 58263T

an emphasis on nontraditional students to improve their life circumstances through
education including those attending apprenticeship programs as well as those attending
colleges, universities and vocational schools.

Scholarship recipients are to be selected on an objective and nondiscriminatory basis. To
this end, the group from which grant recipients are selected must be sufficiently broad so
that giving grants to one or more members of the group fulfills a charitable purpose.
Scholarship recipients must be students who are pursuing studies at an “educational
institution” described in section 170(b)(1)(A)(ii) of the Code (i.e., an institution that
normally maintains a regular faculty and curriculum and normally has a regularly
organized body of students in attendance at the place where its educational activities are
regularly carried on). Scholarship funds may only be used for purposes that qualify as a
“scholarship” within the meaning of IRC 117(a) (as in effect on the day before the date of
enactment of the Tax Reform Act of 1986). Included in eligible “educational institutions”
are institutions that provide the organized, related instruction in technical subjects
required by CFR Title 29 — Part 29.5(b)(4) of apprenticeship programs registered by the
U. S. Department of Labor, Office of Apprenticeship, that also meet the criteria of section
170(b)(1)(A)(ii) of the Code.

To be eligible for a scholarship, applicants must, at the time of application, reside in C or,
at such time as your board of directors decides to expand the program, one or more of
the other states in the B, and plan to attend on a full-time basis (or a part-time basis, in
special circumstances) a fully accredited educational institution (including institutions
providing related instruction in technical subjects in apprenticeship programs registered
by the U.S. Department of Labor, Office of Apprenticeship) in the United States. In
addition, to be eligible for consideration, applicants submit with their application: (i) a
detailed plan outlining how the applicant proposes to use scholarship funds, including the
name of the educational institution he or she plans to attend, the tuition, fees and other
expenses that would be necessary for the applicant to attend, the duration and location of
the program, and the degree or certification sought by the applicant (an “Education
Plan”); and (ii) a description of how pursuing the contemplated course of study would
improve his or her life circumstances (a “Personal Essay”). Applicants need not be
traditional students who are generally eligible for scholarship aid from a variety of other
sources. Rather, they may be nontraditional students, such as:

• Individuals whose needs are not being met at their public high schools and need to
attend a private or alternative high school;

• Individuals who received a General Equivalency Degree (“GED”) instead of a high
school diploma;

• Individuals who did not finish high school and have not obtained a GED but would
like to obtain a GED and/or pursue an education at a technical or vocational
school that can teach them a valuable skill for earning a living;

Letter 4792 (10-2012)
Catalog Number 58263T

• Low-income adults who are returning to school, or are starting higher education
for the first time;

• Low-income individuals who will be the first in their family to attend college;

• Individuals who are striving to overcome obstacles in their lives (e.g., foster care
system, homelessness) and are looking to make a fresh start through education;
or

• Returning military.

Scholarship grants awarded will consist of two components. (1)(i) amounts paid to or for
the benefit of the scholarship recipient to cover his or her tuition and fees required for
attendance at the school, plus (ii) an allowance for fees, books, supplies and equipment
required for courses of instruction to be determined by the your Board of Directors from
time to time; and (2) other amounts to aid the recipient in the pursuit of his or her studies,
such as room and board and travel expenses, as determined by your Board from time to
time. The amounts described in (1) will be awarded according to the selection criteria
below. The amounts described in (2) will be awarded based on financial need as
determined by your Board. In the case of apprenticeship training programs, the amounts
described in (1) are the amounts required to cover tuition, fees, books, supplies and
equipment for courses of instruction classified as “the required organized, related
instruction in technical subjects” required by CFR Title 29 — Part 29.5(b)(4) of
apprenticeship programs registered by the U. S. Department of Labor, Office of
Apprenticeship.

Scholarship applicants who meet the eligibility requirements will be evaluated based on
criteria that are appropriate to accomplishing the underlying purpose of the scholarship
which is to enable individuals to complete a high school, undergraduate, graduate or
technical school education in the field of their choice at any accredited school. The
criteria will include (in order of importance), but not be limited to, the following:

• Quality and strength of the applicant's education plan;

• Quality and strength of the applicant’s personal essay;

• Demonstration of motivation, enthusiasm and aptitude to pursue and complete the
educational program;

• Degree of financial need;

• Recommendations from instructors, counselors, principals, supervisors, Co-
workers and others who have knowledge of the applicant’s capabilities;

• Prior academic experience, including grades, class rank and difficulty of academic

Letter 4792 (10-2012)
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program if the applicant has attended an educational institution within five years
from the date of application;

• Performance on tests designed to measure ability and aptitude for educational
work, including the SAT I and II, ACT and Advanced Placement exams, or other
relevant aptitude exams; and

• Strength of character, including concern for others, commitment to a cause greater
than oneself and/or overcoming major hardship.

You represent that your Board will be responsible for evaluating scholarship candidates
and approving all scholarship grant awards under this program. You may, in your
discretion, utilize the technical, non-voting assistance of professional educators, former
scholarship recipients, scholarship services’ providers and other persons with helpful
expertise in carrying out these functions.

Any person, who participates in the evaluation and selection process, whether in a voting
or nonvoting capacity, must adhere to the relevant policies of yours as they may be
adopted and amended from time to time, including without limitation a conflict of interest
and confidentiality policy. Such persons are obligated to disclose any personal
knowledge of and relationship with any potential grantee under consideration and to
refrain from participation in the award process in a circumstance where he or she would
derive, directly or indirectly, a private benefit if any potential scholarship candidate is
selected over others. No scholarship grant may be awarded to any member of your
Board, any substantial contributor, any of your employees, or any other disqualified
person as defined in IRC 4946(a) with respect to you, or for a purpose that is inconsistent
with the purposes described in IRC 170(c)(2)(B).

On an annual basis, you will publicize the availability of scholarship grants to potential
students living in C or, at such time as your board of directors decides to expand the
program, one or more of the other states in the B, through letters, publications, the
internet, high school counselors, college administrators, community institutions or such
other means of broad dissemination as you determine appropriate. Scholarship
applicants will be required to submit such application forms and supporting materials as
you may deem appropriate on a schedule to be determined by you. Such forms and
supporting materials will include, at a minimum, information concerning the applicant's
financial need, as well as the education plan and personal essay referred to above.

Scholarship grants will be awarded on a term by term basis, with the understanding that if
the recipient is adhering to the conditions of the scholarship, as evidenced by timely
submission of required progress reports to you, scholarships will ordinarily be renewed
for an entire school year (as defined by the educational institution). If the period of time
necessary to attain the degree or certificate sought by the recipient is longer than one
school year, renewal for another school year will be considered by your Board upon the
submission of an application for renewal by the recipient. In general, scholarships will

Letter 4792 (10-2012)
Catalog Number 58263T

only be renewed if the recipient is maintaining at least a 3.0 out of 4.0 grade average (or
its equivalent).

Each scholarship grant recipient will be required to sign a written agreement setting forth
the terms and conditions of the scholarship, such as: (i) the specific purpose of the
scholarship; (ii) its amount and duration; (iii) conditions and procedures for renewal; (iv)
the institution to which it will be paid; (v) requirements for reports, including the due dates
for such reports; and (vi) any other expectations of the recipient during the scholarship
period.

You will ordinarily pay scholarship grant funds directly to the educational institution for the
use of the scholarship grant recipient. Each educational institution must be described in
IRC Section 170(b)(1)(A)(ii). You will notify each scholarship recipient's educational
institution of the award and the terms and conditions of its use. The notification will
specify that all amounts must be used exclusively for tuition, fees, books, supplies,
equipment and room and board (if applicable) as necessary for the recipient to pursue his
or her education. The notification will describe the reporting requirements and will specify
the date by which the educational institution must comply with the reporting requirements.
A representative of the educational institution must sign and return a copy of the
notification, agreeing to the reporting and distribution requirements, before any funds are
disbursed.

If, for any reason a scholarship grant is paid to a person rather than the educational
institution attended by the scholarship recipient, the you will secure from the recipient an
agreement that he or she will furnish you with: (i) reports of his or her courses taken and
grades received in each academic period, and (ii) proper receipts to evidence that the
funds have been used by the recipient for the purposes determined under the
scholarship. The reports must be verified by the educational institution attended by the
recipient, and must be furnished at least once per term, as soon as available after the
end of the term, as well as upon completion of his or her studies at the institution. If you
obtain information indicating that scholarship funds are not being used for the purposes
of the scholarship grant, or if the recipient fails to provide the required reports in a timely
manner, you will investigate the use of such funds.

While conducting its investigation, you will withhold further payments to the
recipient until any delinquent reports have been submitted. If you determine that
scholarship funds have been improperly diverted, you will:

• take all reasonable and appropriate steps either to recover the diverted funds or to
ensure restoration of the funds and dedication of other scholarship funds held by
the recipient to the purposes of the scholarship; and

• Withhold further payments to the recipient until you have received the
recipient’s assurances that future diversions will not occur and you have
required the recipient to take extraordinary precautions to prevent future diversions
from occurring (provided, however, that if the recipient has previously diverted

Letter 4792 (10-2012)
Catalog Number 58263T

scholarship funds, you will withhold further payments until such funds are, in fact,
recovered or restored).

The phrase "all reasonable and appropriate steps" includes legal action where
appropriate, but need not include legal action if such action would in all probability not
result in the satisfaction of execution on a judgment.

You represent that you will maintain records with respect to all scholarships made to
scholarship recipients. Such records will include: (i) all information you obtained to
evaluate the qualification of potential scholarship recipients; (ii) identification of the
recipients (and any information sufficient to establish that they are not disqualified
persons); (iii) specification of the amount and purpose of each scholarship; and (iv) any
additional information you obtained in complying with the Plan, including supervision of
the scholarships and investigation and recovery of diverted scholarship funds.
Information pertaining to unsuccessful applicants for awards will be kept along with
information on successful applicants. Records pertaining to any scholarship grant made
pursuant to this program will be kept for no less than three years after the filing of the
your annual tax return for the period in which the last installment of such grant was paid.

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

Letter 4792 (10-2012)
Catalog Number 58263T

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