IRS approves trade-school scholarships for low-income high school seniors

Plain-English summary

A private foundation proposed scholarships for low-income graduating seniors who wanted trade training rather than a traditional college program. Applicants would document financial need, explain their intended trade, and provide recommendations. The foundation would set award numbers and amounts based on its budget, qualified applicants, and the tuition required for each trade program, then pay the school directly. Students had to attend required classes, maintain passing grades, submit records, and complete the program, with warnings and lost future funding for violations. The IRS approved the procedures under IRC Section 4945(g)(1), making compliant scholarship expenditures nontaxable to the foundation.

Ruling snapshot

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

Full text (IRS public release)

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

Employer Identification Number:

Number: 201809012
Release Date: 3/2/2018 Contact person - ID number:

Contact telephone number:

Date: December 6, 2017

LEGEND UIL: 4945.04-04
w dollars= Amount

x dollars = Amount

z dollars = Amount

Y = Range of numbers

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. The purpose of your
program is to offer high school seniors, not interested or able to attend a traditional
college program, the opportunity to secure an education and eventual employment in a
trade. You will publicize your program at local high schools and on your website. You
will have meetings with high school counselors and brochures will be available.

To be eligible, students must be graduating high school seniors interested in beginning a
career in a trade, rather than in a traditional college environment, and from a low-income

Letter 4792 (10-2012)
Catalog Number 58263T

household. You define low-income as single earner family income less than w dollars
and dual earner family income less than x dollars a year.

Students must complete an application including an essay of intent stating their desired
trade interest, recommendations from teachers or other staff members, and a statement
of financial need. Financial need will be demonstrated through the SAR page from the
FAFSA form, the first two pages of the parents’/guardians’ tax return, or a financial
statement.

You will award in the range of Y scholarships annually. This number will be determined
by your Board, budget, and number of qualified applicants. Individual scholarship
amounts will not exceed z dollars. The amount will be determined by research into the
trade school programs and maximum tuition required to fulfill the course. You will pay
funds directly to the student’s school. Funds will then be applied to the enrolled students
who are in good standing.

To maintain their scholarship, students must attend all required classes, uphold passing
grades in all required courses (a 2.0 grade point average or Pass), and receive a
certificate of completion. Students will be required to submit attendance records and end
of semester grades. You may contact or interview Technical School staff as a mid-term
check-in. Students will be provided with a warning should either their grades or
attendance fall below requirements. Warnings will be provided in the form of a letter to
the student and the school immediately following notification that grades or attendance
have fallen below the requirement. Warnings will be escalated to a violation should a
semester of grades or attendance be below the requirement. If the student violates the
requirements of the scholarship, pro-rata funding of the remaining scholarship dollars will
not be awarded to the student.

Current selection committee members were selected based on their involvement with the
community educational system and overall interest and awareness of the scholarship
program. An interview process to select a new member will be conducted should a
member no longer desire to serve. Current committee members facilitate the process
and new members will be determined by unanimous decision. Should there be no
unanimous decision, your acting Director will provide the deciding vote.

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 that you will maintain the following: (1) all records relating to individual
grants including information obtained to evaluate grantees, (2) identify whether a grantee

Letter 4792 (10-2012)
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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.

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.

e 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.

Letter 4792 (10-2012)
Catalog Number 58263T

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