IRS approves trade school and college scholarship procedures

Plain-English summary

A private foundation requested advance approval for a scholarship program serving high-achieving graduating students who were active in extracurricular and community activities. Recipients could use the one-time awards at qualifying trade schools, colleges, universities, graduate institutions, or professional schools in the designated state. The foundation would pay each recipient's school directly, require proof of enrollment, review reports, investigate diverted funds, and maintain grant records. The IRS approved the procedures under section 4945(g)(1), effective November 23, 2015. Grants made under the approved procedures would not be taxable expenditures, and recipients could exclude qualifying scholarship amounts used for tuition and related expenses subject to section 117(b).

Ruling snapshot

• Question: Did the foundation's scholarship selection and supervision procedures satisfy the advance-approval rules?
• Outcome: Approved, assuming the foundation operates the program as proposed.
• Key authorities: IRC §§ 117, 170, and 4945(g).

Full text (IRS public release)

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

Release Number: 201641028
Release Date: 10/7/2016 Employer Identification Number:

Date: July 12, 2016
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
P = Program name

Q = State

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 effective November 23, 2015.
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 P.

The purpose of P is to provide funds for the recipient to attend a state certified public or
private trade school, technical or vocational school, community college, junior college,
college, university, post-graduate institution, or professional school in the state of Q.

The scholarships will be advertised in the local newspaper and notices and applications
are sent to the local high school counselors. The selection committee is comprised of

Letter 4792 (10-2012)
Catalog Number 58263T

individuals from the community, including an administrative officer of the local high
school.

All interested students must submit four copies of the scholarship application to the
board. To be eligible for P, applicants must be in top 10% of their graduating class and
demonstrate that they work hard to achieve goals. Applicants must also be involved in
extra-curricular activities as well as in the community.

The amount and quantity of the scholarships will be determined annually based upon the
amount that needs to be distributed to be compliant with the private foundation minimum
distribution requirements. But normally, as the board likes to benefit as many students as
possible, the amount of the scholarships are between x dollars and y dollars each.

The scholarships are one-time awards. All scholarship disbursements are sent directly to
the enrolled institution of the recipient. All scholarship funding shall be based on
information provided that includes proof of enrollment and student identification number.
If the student doesn’t attend after enrolling, the scholarship is refunded.

You will arrange to receive and review grantee reports annually and upon completion of
the purpose for which the grant was awarded. You will investigate diversions of funds
from their intended purposes. You will take all reasonable and appropriate steps to
recover diverted funds, ensure other grant funds held by a grantee and 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 properly supervise and
investigate 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).

• The grant is to be used for study at an educational organization described in Code
section 170(b)(1)(A)(ii).

Letter 4792 (10-2012)
Catalog Number 58263T

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.

We've sent a copy of this letter to your representative as indicated in your power of
attorney.

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