Local high-school scholarship procedures received approval

Plain-English summary

A private foundation proposed fewer than five scholarships each year for local high-school graduates attending recognized educational institutions full time. A selection committee would evaluate academic achievement, citizenship and extracurricular activities, and financial need. Although committee members were relatives of the foundation's founders, relatives of committee members, officers, directors, and substantial contributors were ineligible for awards. Scholarship amounts would reflect available resources and recipient need, with payments made directly to the educational institution and continued eligibility tied to satisfactory progress. The foundation also committed to annual reports, investigation and recovery of diverted funds, and complete grant records. The IRS approved the procedures under section 4945(g)(1), so grants made as proposed would not be taxable expenditures.

Ruling snapshot

• Question: Did the foundation's local scholarship procedures satisfy the advance-approval rules for grants to individuals?
• Outcome: Approved, assuming the program operates as proposed
• 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

Release Number: 201623016
Release Date: 6/3/2016
Employer Identification Number:

Date: March 11, 2016
Contact person - ID number:

Contact telephone number:

LEGEND
W= Scholarship Program

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)).

Description of your request

Your will operate a scholarship program called W. The purpose of W is to assist
individuals attending recognized educational institutions with expenses such as tuition,
room and board, and other educational expenses.

Your scholarships will be publicized by the local high schools. All graduating high school
students from local high schools who will attend higher education institutions as full time
students will be eligible to apply.

Your selection committee will evaluate applicants based on scholastic and academic
achievement, citizenship and extracurricular activities, and financial need. The selection
committee consists of relatives of your founding members. Successor members of the

Letter 4792 (10-2012)
Catalog Number 58263T

selection committee will be selected by remaining members and will be descendants of
your founding members unless all such individuals are unable or unwilling to serve.
Relatives of members of the selection committee or of your officers, directors, or
substantial contributors are not eligible for your scholarships.

You expect to award less than five scholarships annually. Scholarship amounts will be
determined based on your financial resources and the financial need of the recipients.
The scholarships will be paid directly to the educational institution each recipient is
attending and the educational institution will apply the scholarship funds only for enrolled
students who are in good standing with the institution and have achieved satisfactory
academic progress. Scholarship funds will not be applied if a student is in violation of
these terms In order for the scholarship recipient to obtain, maintain, or qualify for
renewal of a scholarship, the recipient must achieve satisfactory academic progress as
determined by the selection committee members on an individual basis.

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, investigate diversions
of funds from their intended purposes, 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 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).

• 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