IRS approves need-based college scholarship procedures

Plain-English summary

A private foundation proposed one-time college scholarships for students selected by participating schools. A school had to be a commercial customer of a specified bank and have more than half of its students eligible for free or reduced-price lunches. Recipients would be chosen based on financial need or scholastic achievement, could not be related to foundation insiders or selection officials, and had to attend an accredited college, university, or technical school after graduating from high school within four years. The foundation would verify enrollment, pay the school directly, monitor use of the funds, and seek recovery if a recipient withdrew. The IRS approved the procedures under IRC § 4945(g)(1), making compliant awards nontaxable to the foundation and potentially excludable by recipients under § 117(b).

Ruling snapshot

• Question: Do the foundation's proposed need-based and merit-based scholarship procedures meet the advance-approval rules for grants to individuals?
• Outcome: Approved, subject to operating the program 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

Date: April 13, 2016

Employer Identification Number:

Number: 201628023
Release Date: 7/8/2016   Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

B= Program Name
C= Bank Name

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. B was established
to commemorate the goal of your founders reaching x dollars in deposits on their
anniversary day. One-hundred years later, you have a different x dollars goal which is to
help deserving students attend college by awarding y dollars as part of your multi-year B.
The purpose of your program is to improve access to education for deserving students.
Scholarships will be awarded to students attending a qualifying school.

Letter 4792 (10-2012)
Catalog Number 58263T

2

For schools to qualify, they must complete a participation form attesting to be a
commercial customer of C (the primary operating account is with the bank) and more
than half of their students are eligible for free or reduced lunches. Funds will be awarded
until the x dollars is depleted. You will contact the schools directly to let them know about
B. Participating schools will be responsible for publicizing the program to their students,
administering the application process and selecting recipients. Student selection will be
based on need and/or scholastic achievement. To qualify, students must meet the
following criteria:

• Graduate from high school within four years.
• Attend a two- or four-year accredited college or university, including technical
  schools.
• Attend college in the fall following his/her high school graduation.

The school will provide the chosen recipients contact information to you. You will send
the school the acceptance form for the recipient to notify them of the award. The recipient
will complete the form confirming his/her commitment to meeting the eligibility criteria.
Scholarships will be awarded on a one-time basis and non-renewable.

Amounts may be adjusted annually based on the availability of funds and number of
schools participating. The amounts offered under the scholarship program will be
reviewed and approved by the board of directors annually. Relatives of selecting officials
or of your officers, directors, or substantial contributors are not eligible for awards made
under this program.

You will document the recipient student’s enrollment at the educational institution and pay
grants directly to the educational institution. You will make a reasonable effort to recover
funds from the educational institution in the event that the recipient withdraws from the
institution during the period for which grant funds were to be applied.

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, (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
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 whether 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.

Letter 4792 (10-2012)
Catalog Number 58263T

3

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.

Letter 4792 (10-2012)
Catalog Number 58263T

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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