Private foundation's need-based scholarship procedures are approved

Plain-English summary

A private foundation proposed scholarships for graduating high school seniors and certain recent graduates from a county who had not yet attended a postsecondary institution. Selection would consider financial need, school and community involvement, and academic achievement, with conflict rules barring insiders and relatives of substantial contributors. Awards would be paid directly to eligible colleges or vocational schools, and the foundation would keep records of grants and recipients. The IRS approved the procedures as objective and nondiscriminatory under section 4945(g)(1). As a result, grants made under those procedures would not be taxable expenditures, and recipients could exclude awards used for qualified tuition and related expenses subject to section 117(b).

Ruling snapshot

• Question: Do the foundation's proposed scholarship procedures satisfy the advance-approval requirements of section 4945(g)(1)?
• 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: 201704024
Release Date: 1/27/2017 Employer Identification Number:
Date: November 1, 2016

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

B= Program Name
C= County

x= Number
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
Your letter indicates you will operate a scholarship program called B.

Under B, you will provide up to x scholarships for up to y dollars each year to graduating
high school seniors in C and to those who have graduated within the last five years and
have not attended a post-high school institution. Your scholarships are awarded for the
initial year of college, or technical or vocational school, n with no guarantee of any future
financial assistance, but recipients can apply for financial assistance for additional years.

Letter 4792 (10-2012)
Catalog Number 58263T

year college in the United States, or at a technical or vocational school that is fully
licensed and/or accredited by the U.S. Department of Education. Internet,
correspondence learning programs and for profit colleges will not be considered. Further,
scholarships will be based primarily upon financial need, community and high school
involvement, and scholarship achievement.

Applicants must be citizens or legal residents of the United States. Non-former military
applicants must be at least a two-year resident of C upon the receipt of a scholarship
award. Former military recipients must have lived in C for two successive years out of the
past five and be a one year resident upon the receipt of a scholarship award.

Applicants must also show a financial need. While you have no specific definition or
criteria for the measurement of financial need, financial need may include limited family
income, parental unemployment, single parent household, unusually high medical
expenses, or number of siblings in postsecondary education. In addition, although, you
have no minimum academic requirement for B, academic performance will be considered
as a factor in the making of a decision.

Applicants must complete your application and submit it on-line on your website. The
students should apply with certification from his or her school of financial need and any
additional information that the applicant wishes to be considered.

Recipients will be chosen by a Selection Committee which will consist of your board of
directors. The Selection Committee will have full authority to approve grants after
reviewing the applicant's record as applied or verified by the institution attended by the
student. The Selection Committee may also conduct personal interviews, with individual
applicants if deemed appropriate to determine the motivation, character and potential of
the applicant. The committee will make the final decisions as to both recipients of
scholarship grants and the amounts of each grant. All scholarships will be awarded on a
completely non-discriminatory basis with no barriers based on gender, religion, race,
creed, age, sexual orientation, national origin or disability.

Your Selection Committee must avoid all potential conflicts of interest, private inurement
or appearance of impropriety, and no Selection Committee member shall be in a position
to derive a private benefit, directly or indirectly, in the selection of potential grantees. No
member of a substantial contributor’s immediately family is eligible to be a scholarship
recipient, as defined in Section 507(d)(2) of the Internal Revenue Code.

You will pay the scholarship awards directly to the college, school or university for the
benefit of the recipient for tuition, fees, books and supplies, room and board, or any other
like expenses You will not pay scholarships directly to an individual. In addition, you will
maintain complete records of all grants and grantees and other such records necessary
to fulfill the corporation’s obligations under Chapter 42 of the Internal Revenue Code and
applicable Treasury Department regulations. You also may employ a paid staff to
oversee your grant making procedures.

Letter 4792 (10-2012)
Catalog Number 58263T

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
e 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.

e This determination applies only to you. It may not be cited as a precedent.

e 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

e You cannot award grants to your creators, officers, directors, trustees, foundation
managers, or members of selection committees or their relatives.

e 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).

e 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.

Letter 4792 (10-2012)
Catalog Number 58263T

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T