Local high-school scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed ten one-time scholarships for high-school seniors from a specified city who planned to attend four-year colleges or universities. Schools would submit application packages, and recipients would be selected for merit and need based on academic records, test scores, activities, recommendations, essays, and success despite significant hardship. Relatives of insiders and selection-committee members were ineligible, as were children of judges or lawyers. The foundation promised case histories, annual grantee reports, investigation and recovery of diverted funds, and other grant records. The IRS approved the procedures under IRC § 4945(g)(1), so grants made as proposed would not be taxable expenditures.

Ruling snapshot

• Question: Did the proposed local high-school scholarship procedures satisfy the advance-approval requirements for grants to individuals?
• Outcome: Approved, assuming the foundation operates the program as described.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1).

Full text (IRS public release)

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

Number: 201636047 Employer Identification Number:

Release Date: 9/2/2016
Contact person - ID number:

Date: June 9, 2016 Contact telephone number:
LEGEND: UIL:

X= scholarship 4945.04-04

Y= city

z dollars= dollar 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.

Your purpose is to make a positive difference in the quality of life for people within the
greater Y area, focusing on issues related to education, children, battered women,
homelessness, and people with disabilities.

The purpose of X is to award ten (10) z dollars scholarships to deserving high school
seniors who must reside in Y and will enroll in a four year college or university.

Letter 4792 (10-2012)
Catalog Number 58263T


Your selection criteria consists of the prior three (3) years of academic transcripts (from
9th grade onward), a review of test and/or exam scores, experiences demonstrating
excellence outside the classroom, and achievement of a high degree of academic
success while overcoming a significant financial, social or family hardship.

You will not use a standard pre-printed application form, but rather, rely upon each high
school to submit a detailed information package or folder containing various academic
transcripts, letters of recommendation, writing samples, personal essays, extracurricular
activities, and college or university acceptance confirmations. Students will be
recommended and selected based on merit and need.

You will not renew the scholarships as they are awarded only once to a given recipient.

You will maintain case histories showing recipients of your scholarships, fellowships,
educational loans, or other educational grants, including names, addresses, purposes of
awards, amount of each grant, manner of selection, and relationship (if any) to officers,
trustees, or donors of funds to you.

Relatives of members of the selection committee, or of your officers, directors, or
substantial contributors are not eligible for X. Neither are children of judges or lawyers.

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
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 diversions from occurring.

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.

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).

Letter 4792 (10-2012)
Catalog Number 58263T


• 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