Scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed scholarships for U.S. students pursuing undergraduate or graduate degrees while working to advance American Muslim inclusion or reduce anti-Muslim discrimination. Applicants would be scored on academic performance, a statement of interest, references, and demonstrated leadership; the highest-scoring students would receive one-year awards paid directly to their schools. The foundation also proposed reports, transcripts, investigation and recovery procedures, recordkeeping, and exclusions for relatives of insiders and selection-committee members. The IRS approved the procedures under section 4945(g)(1), so grants made under them would not be taxable expenditures. It also stated that recipients could exclude awards used for qualified tuition and related expenses, subject to section 117(b).

Ruling snapshot

• Question: Do the foundation's scholarship selection, payment, supervision, and recordkeeping procedures qualify for advance approval under section 4945(g)?
• Outcome: approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)(1)

Full text (IRS public release)

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

Release Number: 201702047
Release Date: 1/13/2017 Employer Identification Number:
Date: October 19, 2016

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

X = Scholarship Program
y dollars = Amount of Grant

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
Your letter indicates you will operate a scholarship program called X.

The purpose of X is to assist American students who are focused on advancing American
Muslim inclusion and reducing anti-Muslim discrimination in connection with their pursuit
of a degree in a graduate or undergraduate program at an educational organization
described in Section 170(b)(1)(A)(ii) of the code. Each scholarship awarded shall be in an
amount equal to y dollars, to be applied to the student's tuition. The amount awarded

Letter 4792 (10-2012)
Catalog Number 58263T

may increase as determined by your Board of Trustees. You will publicize the scholarship
on your website and through social media.

The scholarship will be awarded to the students based on the criteria below:

1. The recipient must be a U.S. citizen enrolled in a graduate or undergraduate program
   relevant at an educational organization described in Section 170(b)(1)(A)(ii) of the code.

2. The student must have a GPA of at least 3.0. The student is awarded points based on
   his or her GPA as follows: 3.0-3.2 = 1, 3.3-3.4 = 2, 3.5-3.6 = 3, 3.7-3.8 = 4, 3.9 = 5, and
   4.0=6.

3. The student must provide a Statement of Interest describing his or her commitment to
   work in the area of building inclusive community with American Muslims or reducing bias
   or prejudice against American Muslims. The student is awarded points based on the
   Statement in an amount between one and five.

4. The student must provide two letters of reference: one from an on-campus reference,
   and another from an off-campus reference. The student is awarded points based on each
   letter of reference in an amount between one and three.

5. The student must provide a Statement of Activities to Date demonstrating leadership
   and commitment to building inclusive community with American Muslims, as well as
   submit their current resume. The student is awarded points based on the statement and
   resume in an amount between one and five.

6. Each member of the selection committee will perform the analysis above and add up
   the points for each student. The total points for a student from each member of the
   selection committee will be averaged. The scholarship will be awarded to the student(s)
   with the highest number of points.

Three scholarships will be awarded in the current year. In subsequent years, you may
resolve to award fewer or additional scholarships. The scholarship is awarded for only
one year, and is not renewable.

You will pay the scholarship directly to the university or college registrar. One month after
the commencement of the semester or quarter, the student receiving the scholarship will
be required to submit a report describing the use of the funds. At the end of the term, the
student will be required to submit its grade transcripts. If no report is filed by the student,
or if the report indicates that the funds are not being used in furtherance of the
scholarship purpose, you will investigate the grant. While conducting this investigation,
you will take reasonable steps to recover grant funds, unless it has been determined that
the funds were used for their intended exempt purpose. If the student withdraws from
school and any refund is due, the amount of the scholarship will be repaid.

Letter 4792 (10-2012)
Catalog Number 58263T

3

The selection committee will be composed of qualified members of your staff who are
experts in inclusive American Muslim community-building. Upon any resignation of a
committee member, the President will appoint a successor. You will retain all records
submitted by the grantees. Relatives of members of the selection committee, or of your
officers, directors, or substantial contributors are not eligible for awards made under your
program. You will maintain it its file evidence that no recipient is related to the Foundation
or to any members of the selection committee.

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.

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).

• 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