College scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed scholarships for undergraduate and postgraduate students who had demonstrated academic success and needed financial assistance. Applicants would submit academic, personal, and financial information, and a three-member selection committee would evaluate their prior success, commitment, goals, proposed use of funds, and financial need. Awards would be paid directly to educational institutions, limited to no more than two per year, and monitored through reports and procedures addressing diverted funds. The IRS approved the program under section 4945(g)(1) because the foundation proposed objective and nondiscriminatory selection procedures for scholarships used at qualifying educational organizations. Payments made under the approved procedures would not be taxable expenditures, and awards used for qualified tuition and related expenses could be excluded from recipients' income under section 117.

Ruling snapshot

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

Full text (IRS public release)

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

Release Number: 201742033
Release Date: 10/20/2017 Employer Identification Number:
Date: July 25, 2017

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
X = City
Y = City

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 award scholarship and fellowship grants on an objective and
nondiscriminatory basis to individuals enrolled at college level who have demonstrated
academic success in their chosen field and are seeking to further their studies at
educational institutions described in Code section 170(b)(1)(A)(ii).

Eligible candidates are enrolled at college level, in either undergraduate or post graduate
programs, seeking to further their studies. They are required to provide a description of
the course of study they intend to pursue, a personal statement about their goals and
objectives, a curriculum vitae describing their education and background, two letters of
recommendation, a proposed budget of expenses, and request for funding.

Letter 4792 (10-2012)
Catalog Number 58263T


Scholarship recipients will be selected based upon their prior academic success,
demonstrated personal commitment, and financial need. When selecting among several
qualified applicants, the selection committee will closely consider the financial need, the
specific goals of each applicant, the ways in which a grant will impact the applicant to
achieve his or her goals, and the specific purposes for which the grant request was
made.

Your selection committee will be comprised of three of your governing body members. No
person related to a member of the selection committee, officer or director, substantial
contributor, or any other disqualified person will be eligible to receive a grant.

Grant funds will be paid directly to the educational institution at which the recipient is
enrolled. You will require all grant recipients to provide a report at the end of the grant
term describing how the grant funds were used. Grant recipients will be required to return
any funds that are not used specifically for the educational purposes set forth in their
application.

You will publicize your educational grants through educational institutions and other
charitable organizations in X and Y which have a focus on music and the arts. You will
focus on helping students who require financial assistance to expand their education at
college and post graduate levels.

The number of grants awarded each year will depend on the quality of applications
received, but will not exceed two per year. The amount of the grants will be determined
by the needs of the applicant but will be capped at a reasonable amount.

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, (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 you will do the following: (1) maintain all records relating to individual
grants including information obtained to evaluate grantees, (2) identify 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.

Letter 4792 (10-2012)
Catalog Number 58263T


• 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).

• 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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T