Engineering and science scholarship procedures receive advance approval

Plain-English summary

A private foundation requested advance approval for a scholarship program serving graduating seniors from three local high schools. Applicants must have at least a 3.0 grade point average, plan full-time study at a four-year college, and pursue engineering, technology, mathematics, chemistry, physics, or a related field. School guidance departments select finalists, and an independent committee of local educators and administrators makes the final selection without participation by the foundation's insiders or their families. Scholarship funds are paid in installments for tuition or, when tuition is otherwise covered, for documented college expenses. The IRS ruled that the procedures met IRC § 4945(g)(1), so grants made under them would not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation's proposed scholarship procedures qualify for advance approval under IRC § 4945(g)?
• Outcome: Approved
• Key authorities: IRC §§ 117(a), 170(b)(1)(A)(ii), 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: 201617013
Release Date: 4/22/2016 Employer Identification Number:

Date: January 26, 2016
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

T = State

V = Scholarship Program

W = Area

X = County

z dollars = Amount

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 letter indicates you will operate a scholarship program called V.

Your purpose is to provide a scholarship to a graduating senior in one of the W high
schools who plans to study engineering, technology or any of the related sciences of
mathematics, chemistry or physics. The scholarship will initially be in the amount of z
dollars with discretionary rights by the Board of Directors to increase the amount from
time to time.

Letter 4792 (10-2012)
Catalog Number 58263T

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Students must meet the following criteria to apply for a scholarship:

• Be a graduating senior

• Maintain a 3.0 or higher grade point average

• Be planning to pursue an interest in engineering, technology or the related
  sciences of mathematics, chemistry, or physics at the college level

• Be planning on attending a four-year college in the fall immediately following
  graduation from high school

• Be a full-time resident of X County, attending one of the W high schools

You will accept applications with the following information from interested students:

• Name, address, phone number, and high school

• An essay summarizing the reasons for pursuing the field of study

• A copy of the high school transcript and activity sheet

• At least one letter of recommendation from the school guidance department

Student applicants must also demonstrate proficiency in engineering, technology and/or
related sciences and must demonstrate participation in extracurricular and community
based activities. Students should be well-rounded individuals with outstanding leadership
skills.

Each guidance department at the three W high schools will choose two finalists.
Interviews of up to six finalists will then be conducted by the selection committee. The
selection committee is made up of educators and public school administrators from X
County in T and is chosen by, and under the supervision of, the X Chamber of
Commerce. None of your members, directors, officers, trustees, or employees or any
member of their immediate or extended families may serve on the selection committee or
designate a person to serve on the selection committee.

V is presented in conjunction with the X Chamber of Commerce who agrees to publicize
V and coordinate an appropriate forum for presentation of the award. Scholarship funds
will be paid in two installments. The first installment will be paid when you receive the
invoice from the college where the recipient is enrolled. Half of the scholarship will be
applied to the invoice for tuition. The second installment will be paid upon receipt of the
second semester's invoice to be applied to tuition. If the recipient is already receiving full
tuition scholarships from other sources then payment will be made for college related
expenses such as books, fees, or room and board. You will pay the college directly for
such expenses or reimburse the recipient once you receive receipts. The recipient will not
receive any portion of the scholarship award if he/she is not enrolled in college and the
recipient must sign an agreement to repay any portion of the scholarship not applied to
college tuition or related expenses.

You represent that you will complete the following: (1) arrange to receive and review
grantee reports annually and upon completion of the purpose for which the grant was
awarded, (2) investigate diversions of funds from their intended purposes, and (3) take all
reasonable and appropriate steps to recover the diverted funds, ensure other grant funds

Letter 4792 (10-2012)
Catalog Number 58263T

3

held by a grantee are used for their intended purposes, and withhold further payments to
grantees until you obtain grantees’ assurances that future diversions will not occur and
that grantees will take extraordinary precautions to prevent future diversion from
occurring.

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

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

• 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).

Letter 4792 (10-2012)
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• 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,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T