Revised statewide scholarship procedures are approved

Plain-English summary

A private foundation that already had approval for a scholarship program proposed three changes. Most applicants would need to be credit union members or have a parent who was a member, scholarships would be allocated among school districts using their share of statewide twelfth-grade attendance, and awards could cover fees as well as tuition. Every district would receive at least one scholarship, and relatives of insiders and selection committee members would remain ineligible. The IRS approved the revised procedures under section 4945(g)(1), so grants made as proposed would not be taxable expenditures.

Ruling snapshot

• Question: Did the private foundation's revised statewide scholarship procedures continue to satisfy the advance-approval rules?
• Outcome: Approved, assuming the revised program is conducted as proposed.
• Key authorities: IRC §§ 4945(g)(1), 117, and 170(b)(1)(A)(ii)

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR against all three page images. Obvious OCR misreads were corrected, redacted identifiers are marked [redacted], and wording is otherwise verbatim.

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

Release Numbers: 201848019
Release Date: 11/30/2018                         Employer Identification Number:
Date: September 5, 2018                          [redacted]

                                                 Contact person - ID number:
                                                 [redacted]
                                                 Contact telephone number:
                                                 [redacted]

LEGEND                                           UIL: 4945.04-04
B = Scholarship Program
C = State
E = Credit Union
F = Unrelated Education Foundation
y = number of members

Dear [redacted]:

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

The information submitted indicates you were previously issued a determination letter
granting you advance approval of your scholarship program under Section 4945(g)(1) of
the Code. You now propose to make additional changes to your scholarship program as
follows:

You are changing the parameters of B to limit applicants (other than those applying for
scholarships in conjunction with F) to students who are, or who have at least one parent
who is, a member of E at the time that student applies for the scholarship. You state the
term ‘parent’ includes both natural and adoptive parents and you estimate there are over
y members of E.

You are also changing the manner in which scholarships are awarded. You intend to
allocate a number of scholarships to each school district in C. The number of
scholarships awarded to a school system will be determined by a formula based on each
school system’s 12th grade average daily attendance as a percentage of the statewide
12th grade average daily attendance. Each school district will receive at least one
scholarship. You believe that this change will better reflect the population of the state
and allow school districts to award more scholarships to deserving students. The school
board of each district will then decide how to allocate the scholarships among the high
schools in that district.

Lastly, you intend to allow scholarship awards to be used for fees and tuition, rather than
just tuition as in the past.

You state relatives of members of the selection committee, or of your officers, directors,
or substantial contributors are not eligible for awards made under this program.

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