Scholarship and educational grant procedures are approved

Plain-English summary

A private foundation requested advance approval for two programs serving students with financial need and academic promise. Its scholarship program would support private high school, college, and graduate study, while its educational grant program would fund summer enrichment, standardized-test preparation, and college tours. Recipients would be chosen through objective academic and financial criteria, insiders and their relatives could not benefit, and the foundation would monitor grants and respond to any diversion of funds. The IRS approved the procedures under Sections 4945(g)(1) and 4945(g)(3), so compliant awards would not be taxable expenditures. Scholarship awards used for qualified tuition and related expenses would also be nontaxable to recipients within the limits of Section 117(b).

Ruling snapshot

• Question: Did the foundation's scholarship and educational grant procedures satisfy the advance-approval rules for grants to individuals?
• Outcome: Approved, assuming the foundation operates the programs as described and follows the stated safeguards.
• Key authorities: IRC §§ 74(b), 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g)(1), 4945(g)(3); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

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

Release Number: 201828011
Release Date: 7/13/2018 Employer Identification Number:
Date: April 16, 2018
Contact person - ID number:

                                              Contact telephone number:

LEGEND UIL: 4945.04-04
m dollars = Amount
n dollars = Amount
p dollars = Amount
q dollars = Amount

Dear :

You asked for advance approval of your scholarship and educational grant procedures
under Internal Revenue Code Sections 4945(g)(1) and 4945(g)(3). This approval is
required because you are a private foundation that is exempt from federal income tax.

Our determination

We approved your procedures for awarding scholarships and educational grants. Based
on the information you submitted, and assuming you will conduct your programs as
proposed, we determined that your procedures for awarding scholarships and
educational grants meet the requirements of Code Sections 4945(g)(1) and 4945(g)(3).
As a result, expenditures you make under these procedures won't be taxable.

Also, awards made under the scholarship grant program 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

4945(g)(1) Scholarship Program

Your letter indicates that you will offer a scholarship program to qualifying individuals for
private high school, college or graduate work that will be applied to tuition and other
necessities of the educational curriculum such as books and exam fees.

The purpose of these scholarships is to provide qualifying individuals with the ability to
attend educational institutions to continue their education. Your aim is to find individuals
who do not have financial means to pursue academic excellence and who, if enabled to
pursue academic studies at best-fit institutions, are likely to make a difference in the
world or a contribution to society.

The size of the scholarships will vary and will be dependent on factors such as available
resources, financial need of the applicant, and tuition and educational related expenses,
but will be up to m dollars per academic year. The number awarded will be dependent
upon the number of qualified applicants and available resources. You anticipate awarding
anywhere between two and ten scholarships each year. Whenever possible, you will
award the scholarships to individuals who would not otherwise be able to attend school,
college or continue at the graduate or post-graduate level due to financial ability.

Any qualified student interested in furthering his or her field of study in the United States
will be eligible for your scholarships, which will not be limited to a particular level of study.
It may include high school, college, graduate or post-graduate level activities. You will
make the details of your scholarship program available to local middle and high school
personnel and community-based organizations that work with qualified candidates, as
well as through your website.

Eighth grade students will be eligible for your scholarship program on a need and
aptitude capacity. He or she must be, or plan to become, a candidate for a degree at an
eligible high school and must use the grant to pay for qualified educational expenses.
Graduating high school students (or equivalent) and students seeking to continue their
education at the college, graduate or post-graduate level will be eligible on a need and
aptitude capacity. He or she must be, or plan to become, a candidate for a degree at an
eligible educational institution and must use the scholarships and grants to pay for
qualified educational expenses.

Scholarship recipients will not be limited to any particular school or institution. However,
the educational institutions to which a potential recipient intends to attend must be
described in Section 170(b)(1)(A)(ii) of the Code. When selecting recipients of
scholarships, you will not discriminate on the basis of race, color, creed, age, sex,
gender, sexual preference or orientation, disability, or national or social origin. Recipients
will be selected on an objective and nondiscriminatory basis.

4945(g)(3) Grant Program

The purpose of your grant program is to provide qualified individuals with the ability to
enrich their education in a formal setting and to provide students from lower income
backgrounds with the opportunity to attend programs to enrich their academic
experience, hone their leaderships skills, and provide opportunities for continued learning
over the summer.

You will seek to level the playing field for lower income students by paying third party test
preparation companies to provide tutoring or group courses to lower income students for
the SAT and/or ACT. The purpose of these grants is to increase students' test scores and
increase his or her chances of attending college and qualifying for scholarships that
require minimum test scores.

You will also provide grants to help students attend college tours through organized tour
groups to expose students to the different types of colleges and post-secondary
education institutions available. These grants would only be open to current middle or
high school students.

The number of your grants will be dependent upon the number of qualified applicants and
available resources. The grants would not exceed n dollars for summer programming, p
dollars for test prep, or q dollars for college tours. Grant applications will be solicited
annually. Grants are not renewable. However, recipients may reapply for a grant for a
different educational enrichment activity.

Rising eighth grade students are eligible for your grant program, which is based on need
and aptitude. Whenever possible, you will award the grants to individuals who would not
otherwise be able to attend programming or achieve academic excellence due to
financial ability.

The grant applicant must provide links to the website for the program or test prep
company they hope to attend as well as unofficial transcripts, an essay, application
materials, family income estimate and letters of recommendation. Grants may be used to
further academic study over the summer, increase standardized test prep, or enrich post-
secondary or career knowledge through other organizations. A student could not request
funds for a personal project but rather a formal course of study or test prep. Whenever
possible, the grant will be paid directly to the educational enrichment third party or school
but, if needed, the recipient may apply for reimbursement of educational expenses.

In selecting individuals to receive both your scholarships and grants, you will look at the
applicant's aptitude and potential based on past accomplishments, prior academic
performance and overall character. Applicants having the most promise in terms of
academic ability and likelihood of growing and benefiting from the course of study will be
selected. The decisions will be non-biased and those best qualified, most promising, and
most in need will be chosen.

The main criteria to be used in the selection of recipients of your scholarships and grants
will be academic performance and financial need. To qualify for renewal of a scholarship
or grant, recipients must demonstrate continued need and must maintain a passing grade
point average and enrollment at their educational institution.

Your selection committee will consist of your board of directors. However, your board of
directors may appoint a selection committee consisting of volunteers and/or your
directors. Neither your board of directors, the selection committee members, their
relatives, nor any other disqualified persons will be in a position to receive a private
benefit, directly or indirectly, from the award of any of the scholarships.

For all of your programs, you represent 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 diversions from occurring.

You represent that you will: (1) maintain all records relating to individual grants including
information obtained to evaluate grantees, (2) identify whether a grantee is a disqualified
person, (3) establish the amount and purposes 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 Section 117(a) and is to be used for
  study at an educational organization described in Section 170(b)(1)(A)(ii); or

• A prize or award subject to the provisions of Section 74(b), if the recipient of
  the prize or award is selected from the general public; or

• To achieve a specific objective; produce a report or similar product; or
  improve or enhance a literary, artistic, musical, scientific, teaching, or other
  similar skill or talent of the recipient.

To receive approval of its educational grant procedures, Treasury Regulation Section
53.4945-4(c)(1) requires that a private foundation show:

• The grant procedure includes an objective and nondiscriminatory selection
process.

• The grant procedure results in the recipients performing the activities the grants
were intended to finance.

• The foundation plans to obtain reports to determine whether the recipients have
performed the activities that the grants were intended to finance.

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