Foundation's university scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed scholarships for qualifying members of a university chapter who needed tuition assistance. An independent selection committee would consider academic standing, financial need, and involvement in the chapter and university, while excluding relatives of committee members and other disqualified persons. The IRS approved the foundation's award procedures as objective and nondiscriminatory under section 4945(g)(1). Grants made under the approved procedures would not be taxable expenditures, and awards used for qualified tuition and related expenses could be excluded from recipients' income under section 117.

Ruling snapshot

• Question: Did the foundation's scholarship procedures qualify for advance approval under section 4945(g)?
• Outcome: Approved, subject to operating the program as described and maintaining oversight and records.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4942, 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: 201609009 Employer Identification Number:
Date: November 30, 2015
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
W= Program Name

X= Chapter Name

Y= Association Name

Z= University 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 will operate a scholarship program called W. Your purpose is to
engage in charitable activities by enhancing access to higher education.

The purpose of W is to provide tuition assistance to members of the X chapter of Y at Z.
Specifically, you will provide scholarships to certain academically qualified students only
for the spring semester who are pursuing an undergraduate, graduate or post-graduate
education at Z and who are members of the X chapter of Y at Z. The president of the X

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chapter of Y publicizes W, distributes information about W and provides applications to
interested students.

The number of scholarships that will be awarded each year and the amount of each
scholarship will vary depending upon the Required Amount and the number of qualified
applicants. The Required Amount must be equal to or greater than the amount that must
be distributed to enable you to satisfy the Code Section 4942 “minimum distribution”
requirements (after taking into account administrative expenses and qualifying
distribution carry forwards).

To be eligible for tuition assistance, an applicant does not have to be a United States
citizen, but must be currently enrolled as a full-time student at Z and be an active
member of Y. In addition, an individual must be in good standing both academically with
Z and within the Y community; applicants must also be eligible to receive financial aid
from Z and/or be currently borrowing funds to pay tuition to Z.

Individuals interested in applying for tuition assistance must send an application via email
to you containing the following:
• Name;
• Hometown;
• Anticipated year of graduation at Z;
• Major(s)/Minor(s);
• Cumulative GPA as of the most recently completed semester;
• Total estimated tuition cost for the spring semester;
• Other sources of funds available to pay the spring semester tuition, including, but
not limited to, scholarships, loans, gifts and family resources;
• Summary of their involvement in activities at Y;
• Summary of their involvement at Z;
• Any other factors they would like you to consider.

Your Scholarship Selection Committee reviews the applications, determines the number
of scholarship that shall be awarded, determines the amount of each scholarship and
advises you which students shall receive scholarships. In making its selections, your
Scholarship Selection Committee considers each applicant’s contribution to the X chapter
of Y and Z. All scholarships shall be awarded on an objective and non-discriminatory
basis. No scholarships may be awarded to any individual who is related by blood,
adoption or marriage to any member of your Scholarship Selection Committee or any
disqualified person of yours as a first cousin or closer relative. The scholarships may be
renewed annually provided that the student maintains a 2.8 cumulative grade point
average on a 4.0 grade scale or its equivalent of B-.

You will pay the scholarship proceeds directly to Z for the benefit of the recipient. You
provide a letter to Z specifying that Z’s acceptance of the scholarship proceeds
constitutes Z’s agreement to (i) refund any unearned portion of the scholarship, if
subsequent to the payment of a scholarship, a scholarship recipient fails to meet any

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term or condition of the Scholarship Program; and (ii) notify you if a scholarship recipient
fails to meet any term or condition of the Scholarship Program.

You represent that you will arrange to receive and review grantee reports annually and
upon completion of the purpose for which the grant was awarded. You will investigate
diversions of funds from their intended purpose as well as take all reasonable and
appropriate steps to recover diverted funds, ensure other grants funds held by the
grantee are used for their intended purposes, and withhold further payments to grantee
until you obtain grantees assurances that future diversions will not occur and the
grantees will take extraordinary precautions to prevent future diversions from occurring.

You also represent that you will maintain all records relating to individual grants, including
information obtained to evaluate grantees, identify whether 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.

• 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

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• 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,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T