IRS approves a foundation's scholarship procedures for charter-school graduates

Plain-English summary

A private foundation asked the IRS to approve in advance how it awards a
scholarship program aimed at charter high school seniors. Private foundations
that give grants to individuals for study can face an excise tax under Code
Section 4945 unless the IRS first approves the selection procedures. This program
targets graduating seniors from charter high schools in eight counties of a
particular state, requiring a minimum GPA, standardized test scores above the
fiftieth percentile, and documented community service. A selection committee
made up of the foundation's board weighs financial need, community service, and
academic record, and disqualified persons and insiders' relatives are barred from
receiving awards. The IRS determined the procedures meet Code Section 4945(g)(1),
so the grant payments are not taxable expenditures, and the scholarships are not
taxable income to recipients who use them for qualified tuition and related
expenses under Code Section 117(b). This is a routine advance approval.

Ruling snapshot

• Question: Do the foundation's scholarship grant procedures qualify for advance approval under Code Section 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC § 4945(g); IRC § 117; IRC § 170(b)(1)(A)(ii), § 170(c)(2)(B)

Full text (IRS public release)

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

Release Number: 201850022
Release Date: 12/14/2018 Employer Identification Number:
Date: September 18, 2018

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
X = Name
Y = 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.

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 provide scholarships to qualified students to assist such students
in attending a two or four-year college, trade school, technical school or similar post high
school educational institution meeting the requirements of Section 170(b)(1)(A)(ii) of the
Code.

To be eligible for X, applicants must:

• Be a high school senior graduating from a charter high school in one of eight
counties located in the state of Y:

Letter 4792 (10-2012)
Catalog Number 58263T

• Provide documentation signed by a school or charitable organization showing at
least 50 hours of community service served in the last three-year period;

• Have an overall high school GPA of 3.0 or greater on a 4.0 scale;

• Have an SAT or an ACT score above the fiftieth percentile.

At no time will any member or relative of a member of your board of directors (or any
other disqualified person with respect to you) be eligible for X. In addition, any individual
living with, related to, or employed by a director of yours is ineligible for X.

All applicants must submit a completed application to you on line. In addition, supporting
documents must be submitted by mail which include transcripts, documentation of
community service, test scores and an essay describing the applicants' plans to continue
serving their community as well as the completed FAFSA.

Furthermore, applicants will receive email acknowledgment of receipt of their applications
and supporting documents. You will not consider incomplete application packets.

Recipients will be selected by your selection committee which consists of your board of
directors. They will determine the merit of each application by considering the financial
need, commitment to community service, and academic qualifications of each applicant.
Your selection committee may also conduct a personal interview in its sole discretion.
You will notify the recipients via phone or regular mail. In addition, recipients must
provide you a plan showing how they will continue their community service while
receiving the scholarship. Furthermore, you will send checks to each recipient's home
address that will be made payable to the school prior to the start of the following
semester/quarter.

You will award scholarships each year based on your resources as well as determine the
amount of each scholarship on case by case basis. Furthermore, scholarships are
renewable for up to four school years, payable in one to four payments consistent with
the school calendar.

To renew, recipients must:

• Maintain twelve hours of course work for each semester.

• Provide copies of report cards showing they have maintained a GPA of 3.0 per
semester on a 4.0 scale prior to the start of the next term. Recipients, whose
grades fall below 3.0 will be allowed one semester of probation to bring up their
grades to 3.0. A recipient with a GPA below 3.0 for two semesters will become
ineligible to receive a scholarship the following term.

• Provide the completed form signed by the applicable organization you provide
documenting that they have met the community service requirements of either 25
community service hours per quarter or 50 community service hours per semester.
A recipient serving less hours than that required will be allowed one semester of
probation to bring up their number of community service hours. A recipient with

Letter 4792 (10-2012)
Catalog Number 58263T

community service hours below the required amount for two consecutive terms will
become ineligible to receive a scholarship the following year.

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 the 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 maintain all records related to the following: (1) individual
grants including information to evaluate grantees, (2) grantees which are identified as a
disqualified person, (3) how the amount and purpose of each grant was established, and
(4) how you established supervision and investigation of the 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.

• 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

Letter 4792 (10-2012)
Catalog Number 58263T

• 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.

We've sent a copy of this letter to your representative as indicated in your power of
attorney.

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