Private foundation's scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed annual scholarships for students in good standing at accredited higher-education institutions in the United States and abroad. Recipients would be chosen based on financial need, academic achievement, community involvement, leadership, disadvantaged background, and other stated preferences. Relatives of the family-based selection committee and other disqualified persons were ineligible, and awards would be paid directly to schools for tuition. The foundation also promised annual reporting, investigation and recovery of diverted funds, and detailed grant records. The IRS approved the procedures under IRC § 4945(g)(1), so compliant grants would not be taxable expenditures and could be tax-free to recipients when used for qualified expenses under § 117.

Ruling snapshot

• Question: Did the private foundation's proposed scholarship procedures satisfy the advance-approval rules for grants to individuals?
• Outcome: Approved, assuming the program is conducted as proposed.
• 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: 201636048 Employer Identification Number:

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

Date: June 6, 2016 Contact telephone number:

LEGEND UIL: 4945.04-04

W= Publication
X= Publication
Y= City

Z= Name

b dollars= Amount
c = Number

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)).

Letter 4792 (10-2012)
Catalog Number 58263T


Description of your request
Your letter indicates you will operate a scholarship program.

The purpose of your program is to provide scholarships to students enrolled and in good
standing at accredited higher educational institutions described in Section 170(b)(1)(A)(ii)
in the United States and internationally beginning in the next academic year.

You will publicize the scholarships by putting a notice regarding the availability of the
scholarships in educational publications such as W and X. You will also be publicizing the
scholarships in the manner that you normally use for publicizing grants to 501(c)(3)
educational institutions.

All students enrolled at accredited institutions of higher education in the United States
and abroad who are in good academic standing and who can demonstrate financial
assistance are eligible for your program.

Your officers will determine how the applicants will apply for your program. For example,
applicants may apply through a formal application or a letter indicating a desire to be
considered.

Your selection committee currently consisting of four members of the Z family will select
the recipients based on financial need. Preference will be given to students who:

1. Demonstrated academic achievement, including grades, rank in class,
standardized test scores and achievement test scores;

2. Exhibited involvement in community and extracurricular activities;

3. Demonstrate leadership skills;

4. Have disadvantaged backgrounds and have overcome barriers and difficulties
during their lives and to students who are residents of Y.

Criteria for membership on the selection committee include being a member of the Z
family and having an interest in the education of young people with less financial means.
No formal process for replacing members of the selection committee has been
determined yet, but if a member resigns, a new person will be sought from the Z family.
Relatives of members of the selection committee and of officers, directors and substantial
contributors will not be eligible for scholarships made under your program.

The amount you award each year may vary somewhat depending on your annual income
but the total amount awarded each year will be in the range of b dollars. This total
amount will be given to c students or shared between several students each year. The
individual amounts of each scholarship will vary based on the number of recipients and
your income. The scholarships will be awarded on a year-by-year basis, so there will be
no renewal of a scholarship. Students may reapply and will continue to be eligible for a
scholarship as long as they are enrolled in accredited institutions of higher education in
the United States and abroad, are in good academic standing, and can demonstrate
financial need. Your officers will develop a list of preferred institutions.

Letter 4792 (10-2012)
Catalog Number 58263T


The scholarship money will be paid directly to the school and will only be applied to
tuition for a student in good academic standing. The scholarships will be awarded on an
annual basis, and your officers will ask the school to provide a quarterly status on each
student, as well as, provide you with a report as soon as a scholarship recipient does not
maintain good academic standing. If a scholarship recipient leaves the school during the
course of an academic year, a refund of the scholarship money will be sought to the
extent consistent with the policies of the school.

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 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 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 as 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:

Letter 4792 (10-2012)
Catalog Number 58263T

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