Law student scholarship procedures received advance approval

Plain-English summary

A private foundation requested advance approval for a scholarship program serving second-year students at three qualifying law schools. Applicants would be evaluated by a committee using academic performance, writing ability, journal participation, relevant experience, volunteer work, and interviews, without discrimination based on protected characteristics. Relatives of committee members, foundation officials, and substantial contributors were ineligible, and recipients had no preexisting relationship with the sponsoring corporation or trustee. Scholarship funds would be paid directly to the school for tuition, with reporting, recordkeeping, investigation, and recovery procedures for diverted funds. The IRS approved the procedures under section 4945(g)(1), so compliant scholarship expenditures would not be taxable expenditures.

Ruling snapshot

• Question: Did the foundation's law student scholarship procedures qualify for advance approval under section 4945(g)(1)?
• Outcome: Approved.
• Key authorities: IRC §§ 117, 170, and 4945.

Full text (IRS public release)

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

Employer Identification Number:

Date: July 20, 2016
Contact person - ID number:

Number: 201642038 Contact telephone number:
Release Date: 10/14/2016

LEGEND UIL: 4945.04-04

B= Program Name
C= Individual

D= Corporation
E= School Name
F= School Name
G= School Name

w dollars= Amount
x dollars = Amount
y= quantity

Dear Applicant:

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 program called B which was established in honor of
C, who served as D's General Counsel for the larger part of his long career at D.

Letter 4792 (10-2012)
Catalog Number 58263T

Under B, you will award a non-renewable scholarship grant of x dollars to be applied to the
selected student's second year tuition at one of three law schools consisting of E, F, and G,
which are educational organizations described in Code section 170(b)(1)(A)(ii).

The selected student will, in addition, be given a full-time, paid internship opportunity with D
that is also paid by D, to take place in the summer prior to the recipient's second year of
studies. There has been one legal intern in each of the last three years and there have
been in the range of y applicants of very high caliber. Other departments such as
accounting, tax, marketing, human resources, benefits, and treasury also offer similar
internships with similar compensation and duration. For example, a typical intern in most
departments works about 6 weeks and is paid w dollars an hour and is exposed to all facets
of the particular specialization. All interns are also provided seminars by senior
management from all functional areas of D. At the end of their internship, all interns must
present a project that they have worked on during their internship. No legal
intern/scholarship winner will have a preexisting relationship with any employee of D or your
trustee. No intern/scholarship winner is required to sign any employment agreement or
recruiting agreement. Both the internship and the scholarship are highly desirable from a
financial and experience view point. Winners chose to participate in both. It is expected that
in the future, the winners would participate in both programs.

To be eligible for the scholarship, applicants must have completed their first year of law
school at one of three law schools consisting of E, F, or G. Relatives of members of the
selection committee, or of your officers, directors, or substantial contributors, are ineligible
for the program.

You will also advertise B by posting an announcement on the career services’ websites at E,
F, and G. Applicants must submit a cover letter, a current resume, both their law school and
undergraduate transcripts and a writing sample consisting of an essay. The recipient will be
chosen by a selection committee consisting of attorneys in the D Legal Department and at
least one of your trustees

The selection committee will first rank the applicants on their academic performance and
writing proficiency as demonstrated through their grades and writing sample. Additional
favorable factors considered include membership on a law school journal and relevant work
experience and/or volunteerism (e.g., office setting, legal research and writing assistant,
legal aid volunteerism, tax clinic, etc.). The top candidates will then be interviewed by
selection committee members; following the interview, the selection committee will make
their determination taking into consideration the candidate as a whole. Applicants will not
be discriminated on the basis of race, gender, ethnicity, sexual orientation, age, religion, or
any other protected class.

You will transfer scholarship funds directly to the recipient's educational institution at the
beginning of the student's second year of law school to be applied to the student's tuition
bill. The school will provide you financial records and correspondence showing
disbursement of the scholarship funds. Because the scholarship is paid directly to the
school to be applied to the recipient's tuition bill, there is little risk that funds will be misused

Letter 4792 (10-2012)
Catalog Number 58263T

under this arrangement. Accordingly, you have no formal process or procedure for
recovering misappropriated scholarship funds. However, if there is reason to believe that
there have been misappropriated scholarship funds, or if the student has withdrawn from
school during the semester, you would investigate the claims with the help of the school and
seek a refund, if any amount is available to be refunded.

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 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.

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

Letter 4792 (10-2012)
Catalog Number 58263T

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