Local college scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed two scholarships each year for local residents who attended a specified school district and were pursuing undergraduate or graduate education. Applicants would be evaluated on their ability to complete a degree, admission to selective universities, the public benefit of their intended studies, and the likelihood of returning to the community. A three-person committee would select recipients, relatives of insiders were excluded, and students had to reapply annually. Payments would go directly to educational institutions, and recipients had to document enrollment, grades, use of funds, and progress. The IRS approved the procedures under section 4945(g)(1), so awards made as proposed would not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation's local undergraduate and graduate scholarship procedures qualify for advance approval under IRC § 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: 201710039
Release Date: 3/10/2017 Employer Identification Number:
Date: December 12, 2016

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
T= scholarship name
U= school district

V= high school
W= city/state
X= principal
Y= trust officer
Z= individual
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 provide in Code section 117(b)).

Description of your request
Your letter indicates you will operate a scholarship program called T.

The purpose of T is to enable young men and/or women who have attended U, or its
successor, to obtain undergraduate or graduate college education.

Letter 4792 (10-2012)
Catalog Number 58263T

The dollar amount of each scholarship award will vary depending on your income during
the year and the required distribution amount per IRS Regulations. You will award two
scholarships per year.

The availability of scholarships will be made known to the guidance counselor at V, or its
successor. Additionally, available scholarships are listed on V website.

Scholarship recipients must be a resident of W, a graduate or future graduate of U, or its
successor and pursuing undergraduate or graduate college education.

Scholarship applicants will be evaluated based on the following:

• The ability of applicants to pursue and successfully complete a four year degree
course or postgraduate degree course as shown primarily by nationally recognized
text scores and secondarily by grades obtained in high school or college prior to
the application.

• The ability to gain admission to selective universities as shown by national
recognition and ratio of admissions granted to applications submitted.

• The likelihood that the recipient is entering upon a course of study that would be of
benefit to the citizens of W and the likelihood that the recipient might return to 4
after graduation.

Students must reapply each year. Such assistance and relief to any one student during
the remainder of his or her education may be continued if the applicant continues to give
evidence of the qualification which made the applicant worthy of assistance in the first
place.

Members of the selection committee shall be compromised of X, or their designee, Y, or
its designee, and Z. If a vacancy occurs by death, resignation, or refusal to serve, the
vacancy shall be filled by the two remaining advisory committee members and if they
cannot agree within thirty days, you shall break the tie.

Relatives of members of the selection committee, or of your officers, directors, or
substantial contributors are not eligible for awards made under your program.

Scholarships are paid directly to an educational institution. Recipients will annually
furnish the selection committee proof of full-time student status and proof of continuing
enrollment. If enrollment is not maintained, the scholarship will be returned. Recipients
provide grade reports to the selection committee. You will obtain reports on the use of
funds and progress made by the scholarship recipient toward achieving the scholarship
purpose.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

You will (1) arrange to receive and review grantee reports annually and upon completion
of the purpose for which the grant was awarded, (2) investigate diversions of funds from
their intended purposes, and (3) take all reasonable and appropriate stops to recover
diverted funds, ensure other grant funds held by a grantee are 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 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:

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.

Letter 4792 (10-2012)
Catalog Number 58263T

• 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