Scholarship grant procedures receive advance approval

Plain-English summary

A private foundation requested advance approval of procedures for educational grants to people facing financial hardship or other barriers. The program would use objective, nondiscriminatory selection, exclude people related to disqualified persons, verify enrollment and performance, and monitor and recover diverted funds. The IRS approved the procedures under IRC § 4945(g)(1), so grants made under them would not be taxable expenditures. Awards used for qualified tuition and related expenses would also be nontaxable to recipients within the limits of § 117(b).

Ruling snapshot

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

Full text (IRS public release)

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

Number: 201638027
Release Date: 9/16/2016

Date: June 20, 2016

Employer Identification Number:

Contact person - ID number:

Contact telephone number:

LEGEND                                      UIL: 4945.04-04

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

You will operate an educational grant program. The primary purpose of the program is to
aid persons who are in pursuit of educational objectives but may not reach their goal
because of poverty, unexpected financial distress, natural disaster, civil disturbance,
personal or family crisis, cultural or language barriers, loss of parents while a minor, or
similar reasons.

Initially grants are to be no more than y dollars. The maximum amount of the grant will
be determined annually by your directors. The amount of the grant will not exceed the
cost of the education covered by the grant.

Letter 4792 (10-2012)
Catalog Number 58263T


Grants are not renewable. A grantee must submit a new application for each school year
or for each period. The recipients’ performance at school or the use of prior grants will be
considered in deciding whether a new grant will be awarded.

Knowledge of the program is to be disseminated to the public by word of mouth. To be
considered for a grant an application form must be completed. When possible, you will
consult with local community groups, churches, and public charities and other social
welfare agencies for help identify recipients. You will document the applicant’s eligibility
for financial assistance by determining eligibility for social welfare programs. The award
or denial of grants will not be based on any recipient’s race, color, creed, sex, sexual
orientation, age, or religion. You will not make grants to any individual who is related to a
disqualified person.

Your directors will serve as the initial review committee to determine the recipients and
amounts of the grants awarded. Ultimately a separate review committee will review the
applications and make recommendations to the directors to approve or deny a request as
well as the amount of the grants to be awarded. The final decision rests with the
directors, who will make the decision in a nondiscriminatory and objective manner.

Grants are to be supervised or controlled as follows:

• Documentation from the school is obtained to verify the students’ enrollment and
performance. When possible, grants will be made payable to the institution.

• Grantees will be asked to sign a short contract agreeing to use the grant for the
purposes intended and not to use the grant money for purposes expressly
prohibited by your policies and procedures.

• Where reports provided to you or other information indicates that all or any part of
grant funds are not being used for the designated charitable purpose of the grant,
you will conduct an investigation. If there is sufficient evidence that a grant has
not been used for the charitable purpose designated by you, you will take
reasonable and appropriate steps to recover diverted grant funds and/or to ensure
use of other grant funds held by the grantee for the designated charitable
purposes. Any discrepancies or irregularities in the recipient's handling of
distribution(s) will be documented in your records and considered in any future
grant making decisions.

No geographic limitations are to be placed on applicants in order to submit an application.
However; the names of the applicants will be checked against the Office of Foreign
Assets Control (OFAC) list published by the United States Department of the Treasury.

You will maintain records and case histories for all grant recipients which include:
• Name and address of each grant recipient
• Eligibility of each recipient under the guidelines specified herein
• The amount expended to/for each recipient

Letter 4792 (10-2012)
Catalog Number 58263T

• The purpose for which the grant was given
• The manner in which the grant recipient was selected

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, 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 (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 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.

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

Letter 4792 (10-2012)
Catalog Number 58263T

• 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