IRS approves scholarships for students connected to grantee organizations

Plain-English summary

A private foundation proposed scholarships for high school graduates and GED recipients affiliated with its current or former grantee organizations. Awards would support up to four years at an accredited college or university or up to two years at a junior college or vocational program. A committee would select recipients based on character and a minimum 2.0 grade point average, and the foundation would pay schools directly and monitor continued enrollment and academic standing. The foundation also committed to annual reporting, investigation and recovery of diverted funds, and detailed recordkeeping. The IRS approved the procedures under IRC § 4945(g)(1), so grants made under them would not be taxable expenditures. Awards used for qualified tuition and related expenses would also be excluded from recipients' income, subject to IRC § 117(b).

Ruling snapshot

• Question: Do the foundation's procedures for scholarships benefiting students connected to grantee organizations satisfy IRC § 4945(g)?
• Outcome: Approved
• Key authorities: IRC §§ 117, 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

Number: 201620018 Employer Identification Number:

Release Date: 5/13/2016
Contact person - ID number:

Contact telephone number:
Date: February 17, 2016

LEGEND UIL: 4945.04-04

B= Name of Program
C= Name of Company

x dollars = Amount
y 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 provided in Code section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program called B. Your purpose is to
make grants to charitable organizations. B’s purpose is to award scholarships to
individuals to attend a post-secondary educational program at (i) an accredited four-year
college or university for up to four years or (ii) a junior college or vocational program for
up to two years. Recipients will also be offered guidance and support from your
volunteers as well as career mentoring and counseling from C employees.

Letter 4792 (10-2012)
Catalog Number 58263T


Graduating high school students and individuals who have obtained a G.E.D., who will
attend a post-secondary educational institution and have an affiliation with one or more of
your current or former grantee organizations are eligible for a scholarship. Relatives of
members of your Scholarship Selection Committee, members of your Board of Directors
and employees and principals of C are not eligible to apply.

You plan to publicize B among your current and former grantees which include,
educational and community based organizations that provide tutoring, literacy, and
mentoring and after-school programs. You believe this will enable you to identify
potential scholarship recipients who have proven their commitment to succeed. You may
also publicize the availability of the program to other members of the community.

Your current and former grantee organizations will identify candidates who have
benefited them and nominate them for the scholarships. Those nominated will complete
an application, provide you high school transcripts and letters of recommendation.

After applications are submitted, you will form a Scholarship Committee consisting of a
board member, your program director and/or vice president and at least two other
committee members. You will send the applications to all committee members and then
hold a formalized meeting to select the recipients. Recipients will be selected based upon
their personality and character traits that enable them to be successful, and upon a
minimum grade point average of 2.0. Interviews may be scheduled if further information
is needed.

Your board will determine the number of scholarships and the amount that will be
annually awarded based upon your financial resources available for distribution. Currently
you plan to award x dollars per year for four years to an applicant planning to attend a
four-year accredited college or university, and y dollars per year for each year of the
course of study to an applicant planning to attend a junior college or vocational program.

The funds will be sent directly to the school on behalf of the recipients. You will obtain
reports and/or grade transcripts from the institutions where the recipients are enrolled
and will pay grants directly to the educational institution for each student and only for
students who (i) continue to maintain a GPA of 2.0, and (ii) remain enrolled and in good
standing at the institution of the student’s choice. Students will also be required to submit
an annual report of their academic year and the impact of their scholarship. You can
terminate the scholarship if the recipient becomes academically ineligible or the student's
GPA drops below a 2.0. If a student withdraws or is expelled from school, the award will
not be renewed for the following school year.

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 diversion of funds from their intended purposes, and (3) take all
reasonable and appropriate steps to recover the diverted funds, ensure other grant funds
held by a grantee are used for their intended purposes, and (4) withhold further payments
to grantees until you obtain grantees’ assurances that future diversions will not occur and

Letter 4792 (10-2012)
Catalog Number 58263T


that grantees will take extraordinary precautions to prevent future diversion from
occurring.

You represent that you will maintain the following: (1) all records relating to individual
grants including information obtained to evaluate grantees, (2) identify a grantee is a
disqualified person, (3) establish the amount and purpose of each grant, and (4) 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)
Catalog Number 58263T


• 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