Approves need-based scholarship procedures for graduates of one school

Plain-English summary

A private foundation requested advance approval under section 4945(g) for scholarships to financially needy graduates of a particular school who enrolled at accredited educational institutions. The annual number and amount of awards would depend on the foundation's required minimum distribution, the applicant pool, and each student's financial need. A committee of the school superintendent and board members would review applications identified by numbers rather than names, recommend recipients and award amounts, and exclude relatives of committee members and foundation insiders. Scholarships could be renewed for recipients who reapplied, remained in good academic standing, and continued to show need, with funds generally paid directly to the educational institution and subject to reporting, recovery, and recordkeeping procedures. The IRS approved the procedures under section 4945(g)(1), effective September 26, 2017.

Ruling snapshot

• Question: Did the private foundation's need-based scholarship procedures satisfy section 4945(g)?
• Outcome: Approved, effective September 26, 2017, assuming the program is conducted as proposed.
• Key authorities: IRC §§ 4945(g)(1), 4942, 117(a), 117(b), 170(b)(1)(A)(ii), and 170(c)(2)(B)

Full text (IRS public release)

[Redaction note: the IRS release blanks the foundation's identity, employer identification number, and contact information.]

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

Release Number: 201834015
Release Date: 8/24/2018 Employer Identification Number:

Date: May 31, 2018
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
X = Name

Y = City

Z = Name

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. The effective date is September 26, 2017.

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 called X.

The purpose of X is to encourage Z graduates in Y to further their education at an

accredited educational institution including four-year colleges and universities, community

colleges, business schools, nurses training schools, and trade schools.

You will determine the annual number of scholarships by your required minimum

distribution amount (under Code Section 4942), the number of applicants, and the
financial need of each applicant. The amount of each scholarship will vary and will be
based on the financial need of the student and the total amount of scholarship funds.

To be eligible to receive a scholarship, the applicant must be a graduate of Z who
demonstrates financial need and has enrolled at an accredited educational institution.

You will publicize the availability of X to Z graduating seniors through the Y school board
and superintendent. Students interested in the scholarship must submit a detailed
application, provide relevant supporting documents, and complete an essay.

The selection committee, consisting of the superintendent and board members of the Y
school district, will review and evaluate all applications.

In order to insure a confidential and objective competitive selection process, you will use
a procedure that provides for a cover page listing personal information including name,
institution, and applicant and parent addresses. The school will assign each application a
scholarship number and that number will be placed on the pages reviewed by the
selection committee rather than by individual name.

After the selection committee evaluates the applications, they will provide you
recommendations of who should receive the award as well as the amount of the award.
You will follow their recommendations.

Relatives of committee members, or of your officers, trustees, or substantial contributors,
are ineligible to receive a scholarship.

The scholarships are renewable; to be eligible for renewal, the recipient must reapply, be
in good academic standing, and continue to have financial need.

You will pay the scholarship proceeds directly to the educational institution that the
recipient attends for the benefit of the recipient. You will provide a letter to each
educational institution specifying that their acceptance of the funds constitutes their
agreement to (i) refund any unused portion of the scholarship if a scholarship recipient
fails to meet any term or condition of the scholarship; and (ii) notify you if the scholarship
recipient fails to meet any term or condition of the scholarship. If the educational
institution will not agree to such terms, you will obtain the needed reports and grade
transcripts from the scholarship recipient.

You have represented that you will arrange to receive and review grantee reports
annually and upon completion of the purpose for which the grant was awarded;
investigate diversions of funds from their intended purposes; and take all reasonable and
appropriate steps 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 have represented that you will maintain all records relating to your scholarship
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 described in the paragraph
immediately 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.

• 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