IRS approves renewable need-based college scholarships

Plain-English summary

A private foundation proposed scholarships for academically qualified high school seniors with financial need who planned to attend eligible four-year colleges in their state. Awards could cover tuition, fees, supplies, books, and room and board, and could be renewed for four undergraduate years if students maintained a 3.0 grade point average and remained enrolled. A contractor would publicize and administer the program, select recipients, pay awards, keep case histories, and monitor renewal requirements. The IRS approved the procedures under IRC § 4945(g)(1), so grants made under them would not be taxable expenditures. The letter also states that awards used for qualified tuition and related expenses would not be taxable to recipients, subject to IRC § 117(b).

Ruling snapshot

• Question: Do the foundation's procedures for awarding renewable college scholarships satisfy the advance-approval requirements of 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

Employer Identification Number:

Date: April 1, 2016
Contact person - ID number:

Number: 201626028 Contact telephone number:
Release Date: 6/24/2016

LEGEND UIL: 4945.04-04
X= Scholarship Program

Y= State

Z= Organization

b= Number

c 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 X.

The purpose of X is to provide scholarships to individuals for college education. The
scholarships will make college education more affordable for meritorious Y high school
seniors who demonstrate financial need and who plan to attend a college or university in
Y.

Letter 4792 (10-2012)
Catalog Number 58263T


You plan to award approximately b scholarships worth c dollars to deserving high school
graduates for use in their freshman year of college. Awards can be used for tuition, fees,
supplies, books, and room and board. The scholarships are renewable for four years of
use in their undergraduate education, in the same amount each year, on the basis of
maintaining a cumulative grade point average of 3.0 on a 4.0 scale and continued
enrollment in an eligible postsecondary institution in Y. To be eligible for fourth year
funding, students must demonstrate they have taken nine credits by their junior year in
government, civics, or United States history.

To be eligible to apply, an applicant must be a current high school senior at any
secondary school in Y. The high school senior must plan to enroll full-time in
undergraduate study at an accredited, non-proprietary four-year college or university in Y
for the entire academic year. The applicant must also have a minimum grade point
average of 3.0 on a 4.0 scale.

The selection criteria will consider academic performance, demonstrated leadership and
participation in school and community activities, including volunteer work, work
experience, a statement of career and educational goals and objectives, and unusual
personal or family circumstances. Semifinalists will be selected and will be required to
submit transcripts and parent or guardian tax information. Recipients must also
demonstrate financial need.

You plan to contract with Z to provide scholarship management services. All money,
excluding fees and expenses, will be applied for the payment of scholarships pursuant to
the terms of your program. Per the contract, your responsibilities include specifying
eligibility guidelines for X, approving application materials, providing a link from your
website to Z’s website, promoting the scholarship, selecting final distribution amounts,
confirming recipients, and providing the scholarship distribution and management fees.

Z's contracted responsibilities include managing the program according to the program
description, designing and producing e-application materials, installing an e-application,
receiving, acknowledging, and processing all applications, evaluating applications,
notifying semifinalists, selecting and notifying recipients, distributing, receiving, and
processing of renewal forms, tracking renewal students, paying awards on your behalf,
and providing management reports to you to summarize program activities and results.

Pursuant to the contract, Z will publicize the scholarship through press releases and
social media posts, and will target email campaigns to high school seniors, guidance
counselors, and principals. Z will develop solicitation and announcement materials.

Z will make the selection of award recipients. Z will also maintain case histories of
scholarship recipients, including names, addresses, the amount of each grant and the
manner of selection. Recipients will provide grade transcripts to Z, who will monitor
whether GPA requirements were met for renewal, as well as if students have received
the necessary credits to qualify for renewal in their senior year. If the terms of the award
are violated, the student is ineligible to receive the scholarship in the following year or

Letter 4792 (10-2012)
Catalog Number 58263T


any subsequent year. Z will provide management reports to you summarizing program
activities and results.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

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