Foundation's international student scholarship procedures are approved

Plain-English summary

A private foundation proposed scholarships primarily for financially needy students from impoverished countries who would study in the United States, while also allowing U.S. students to apply. Awards could support education from grade school through graduate school and would be based on financial need, academic performance, character, motivation, potential, and references. The foundation would pay schools directly, require grade and progress reports, exclude insiders and their families, investigate diverted funds, and maintain grant records. The IRS approved the procedures under section 4945(g)(1), so compliant scholarship expenditures would not be taxable to the foundation. Awards used for qualified tuition and related expenses also would be excludable to recipients within section 117(b)'s limits.

Ruling snapshot

• Question: Do the foundation's procedures for scholarships to financially needy students satisfy the advance-approval rules for grants to individuals?
• Outcome: approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)

Full text (IRS public release)

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

Release Number: 201726018
Release Date: 6/30/2017 Employer Identification Number:

Date: April 7, 2017
Contact person - ID number:

Contact telephone number:

LEGEND

B = Board Member UIL: 4945.04-04
w dollars = dollar amount

x dollars = dollar amount

y = number
z = number
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. Your purpose is to make
education possible for youth from impoverished countries. Your will award scholarships
primarily to students from impoverished countries who agree to come to the United
States and enroll to study here. Your founder, B, wants to make a positive impact on the
lives of poor children living in impoverished countries by making education possible for
them. However, students from within the United States may also apply and be considered
for these scholarships.

Letter 4792 (10-2012)
Catalog Number 58263T

The scholarship program will provide support to students from grade school to graduate
school level and can be in amounts from w dollars up to x dollars depending on the
individual’s expenses and financial situation. There is no exact minimum or maximum
scholarship amount.

You have an application, which will be disseminated to your partner schools, school
districts, and communities. You will reach out and collaborate with schools primarily in
impoverished countries to find promising student scholars. B may recommend to
candidates that they apply for the scholarship, along with schools or teachers who may
identify potential candidates. These students will be directed to complete an application
form.

Individuals currently enrolled in or accepted to a grade school, college, university, or
graduate school and exhibit financial need are eligible for the scholarship. Recipients will
be selected based on criteria which include financial need, excellent academic
performance, character, motivation, and potential, and personal references. Candidates
will be required to complete an application and be able to provide references, letters of
recommendation, proof of enrollment, financial information, and other documentation
needed to determine eligibility.

Your current and former employees, officers, directors, and agents, and any members of
their immediate family and those living in their households are ineligible to receive your
scholarship.

Your board of directors, consisting of y individuals, including B, is your selection
committee. Applications will be presented to your board of directors at monthly board
meetings. Your board will decide who will receive a scholarship and the amount. B has
the tie breaking vote.

Per your award letter, scholarship funds will be sent directly to schools prior to the start of
the academic year.

You require recipients to maintain a minimum grade point average of z during the term of
the scholarship. You require periodic reports from the educational institution of courses
taken and grades received. Upon completion, you also require a final report. If a student
is in graduate school, you require a report on the progress of the recipient’s thesis or
other project annually that has been approved by a faculty member.

If a recipient fails to submit the reports, does not meet the grades requirement, or does
not comply with requirements of the scholarship, you may terminate the scholarship and
stop distributions.

You represent that 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 steps to recover diverted funds, ensure other grant funds held by a grantee

Letter 4792 (10-2012)
Catalog Number 58263T

are used for their intended purposes, and withhold further payments to grantees until it
obtains grantees’ assurances that future diversions will not occur and that grantees will
take extraordinary precautions to prevent future diversions from occurring.

You also represent that 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 it undertook
the supervision and investigation of grants described in the prior paragraph.

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.

• 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).

Letter 4792 (10-2012)
Catalog Number 58263T

• 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 representatives 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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T