Scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed scholarships for high-potential, low-income students attending college-preparatory high schools or colleges. Selection would consider financial need and academic promise, use a knowledgeable committee and family interviews, and exclude disqualified persons. Awards would be paid directly to schools, could be renewed based on enrollment and a minimum grade-point average, and would be supported by records and annual transcripts. The IRS approved the procedures under IRC § 4945(g)(1), making compliant grants nontaxable expenditures and potentially excludable scholarships to recipients using them for qualified expenses.

Ruling snapshot

• Question: Did the foundation’s proposed 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
P.O. Box 2508
Cincinnati, OH 45201

Department of the Treasury

Release Number: 201545032
Release Date: 11/6/2015
Date: August 11, 2015

Employer Identification Number:

Contact person - ID number:

Contact telephone number:

LEGEND

S = Country
T = Denomination
V = City, Country
W = Area
X = Area
Y = State
w = Number
x = Number
y = Number
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)).

Letter 4792 (10-2012)
Catalog Number 58263T

Description of your request

You will establish a scholarship program to help high-potential, low-income grade school
students attend college-prep high schools and help high school students attend college.
You have not established the number of scholarships to be granted on an annual basis
but anticipate the scholarships to be typically up to z dollars per student per year, and
that over the expected life of w years of the program you intend to grant between x and y
scholarships. You intend to publicize the program through your website and through
direct contact with administration in schools in your target area. The program is to be
established in the X area of Y and may in the future extend to other cities in the S and
internationally, such as in V or other W cities.

To be eligible for one of your scholarship grants, a student must be a graduating student
at a T grade school who is planning to attend secondary school at a T high school or a
graduating student at a T high school who is planning to attend a college or university.
Selection criteria will include financial need and a record of achievement indicating
academic promise. Applicants will be required to submit an application that includes
information on academic performance, the student’s educational goals, annual household
income, and a teacher’s or advisor’s assessment of the student’s achievements and
academic purpose. The scholarship selection committee will meet with qualified students
and their families for an interview to confirm their commitment to furthering the student’s
education. The scholarship selection committee will consist of persons knowledgeable
about education and/or with familiarity or experience with financial aid in the context of
education.

All scholarship grants will be paid to the schools where the scholarship recipients are
enrolled. Scholarships will be eligible for renewal as long as a student remains enrolled in
the college-prep high school or post-secondary educational institution and maintains a
minimum grade point average of 2.5 (or the equivalent, if a different scale is used by the
school). You will require the school and/or student to annually provide grade transcripts
showing enrollment and qualified grade point average. If a student remains enrolled but
fails to maintain the minimum grade point average, you will, at your discretion, place the
student on a one-year probation from receiving scholarship funds or terminate the
scholarship.

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

Letter 4792 (10-2012)
Catalog Number 58263T

• 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

• 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.

Letter 4792 (10-2012)
Catalog Number 58263T

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

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T