IRS approves a private foundation's college scholarship procedures

Plain-English summary

A private foundation proposed awarding one annual scholarship to an incoming college freshman from a specified area who would attend a nonprofit college. Applicants would need a GPA of at least 3.0, volunteer involvement, an essay, references, a transcript, and evidence of college acceptance, and the selection committee would consider merit and financial need. The award would be paid directly to the college in two semester installments, with continued eligibility tied to maintaining a 3.0 GPA. The foundation also committed to publicizing the program, checking application information, monitoring grantee reports, investigating diverted funds, and keeping detailed grant records. The IRS approved the procedures under section 4945(g)(1), so qualifying scholarship payments made under them would not be taxable expenditures.

Ruling snapshot

• Question: Do the private foundation's procedures for selecting, paying, monitoring, and documenting an annual college scholarship satisfy section 4945(g)?
• Outcome: Approved
• Key authorities: IRC §§ 117(a), 117(c), 170(b)(1)(A)(ii), 170(c)(2)(B), and 4945(g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201625020
Release Date: 6/17/2016 Employer Identification Number:

Date: March 23, 2016
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
X = Location

y dollars = Amount

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(c)).

Description of your request

You were formed to help children and adolescents through transitions. You are adding a

scholarship program to help with the transition from high school to college.

You will provide an educational scholarship to one recipient annually to be used for

qualifying expenses such as tuition, fees, and course related expenses including books,
supplies, and equipment. The scholarship is open to all incoming college freshman in the

X area who will be attending a nonprofit college.

Letter 4792 (10-2012)

Catalog Number 58263T

Applicants will fill out an application and submit an essay outlining their qualifications for
the scholarship and their reasons for applying for the scholarship. Applicants should have
a GPA of 3.0 or higher and involvement in volunteer activities. Information about
acceptance to and plans to attend a nonprofit college or university, an official transcript,
and letters of reference for volunteer work or extracurricular activities should also be
included with the application.

The scholarship will be in the amount of y dollars, or z dollars per semester, and will be
given directly to the college or university the recipient attends. The recipient is required to
maintain a 3.0 GPA to continue to be eligible for scholarship and must provide a
transcript each semester that will be reviewed by the selection committee. Scholarships
will not be renewable past the second semester of the recipient’s freshman year.

The scholarship will be publicized through your website and social media. You will also
mail out scholarship applications to local high school guidance counselors.

You will select the scholarship recipient based on merit and financial need. Additionally,
the recipient will be selected in a non-discriminatory fashion in regards to racial
preference. Information contained in the scholarship application, including GPA, will be
verified with the appropriate high school staff prior to disbursing scholarship funds. The
scholarship selection committee is made up of the four members of your Board of
Directors.

You represent that you will (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 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 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 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.

Letter 4792 (10-2012)
Catalog Number 58263T


• 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