Private foundation's scholarship procedures are approved

Plain-English summary

A private foundation requested advance approval for a college scholarship program. The IRS approved the procedures under section 4945(g)(1), so grants made under them would not be taxable expenditures. Applicants had to satisfy academic, financial-need, character, leadership, and enrollment criteria, while relatives of insiders were ineligible and awards had to be objective and nondiscriminatory. The foundation also agreed to monitor recipients, investigate and recover diverted funds, withhold further payments when necessary, and keep detailed grant records. Scholarships used for qualified tuition and related expenses would not be taxable to recipients, subject to section 117(b).

Ruling snapshot

• Question: Did the private foundation's proposed scholarship procedures satisfy the advance-approval rules for grants to individuals?
• Outcome: Approved, assuming the 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 four page images. Obvious OCR misreads were corrected, redacted identifiers and dates are marked [redacted], and wording is otherwise verbatim.

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

Number: 201905006                                Employer Identification Number:
Release Date: 2/1/2019                           [redacted]

                                                 Contact person - ID number:
                                                 [redacted]
                                                 Contact telephone number:
Date: November 6, 2018                           [redacted]

LEGEND                                           UIL: 4945.04-04
B = State
C = Foundation
D = Faith
E = Organization
f dollars = Amount

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

Your letter indicates you will operate a scholarship program. The purpose of your
scholarship program is to provide access to higher education by providing college tuition
assistance to worthy students. You support students with intellectual curiosity both in and
out of the classroom, dedication to fulfilling their responsibilities in the community, and
are committed to the idea of education. Those students who demonstrate the
determination needed to succeed in college and in life are encouraged to apply.

The number of annual grants is contingent upon the number of applicants, cost of
attendance, and amount of funds available, including commitments to current multi-year
grantees. Awards will not exceed f dollars per year, but may be adjusted for inflation in
the future.

Your program will be administered by C who provide administrative support and act as
your service provider. The program will be publicized by C, who will advertise the
program online. C will make recommendations to your trustees who will make the final
determination on who will receive the scholarships and the amount of the grant.

To be eligible applicants must meet the following criteria:

• High school senior at the time of application
• Minimum 2.5 grade point average
• Demonstrate financial need
• Demonstrate traits of high personal character and leadership, and
• Plan to enroll as a full-time student in a four-year program at an accredited college
or university located in the United States.

Additional consideration is given to applicants who demonstrate the desire, discipline,
and determination needed to succeed in college and life and those who take on
leadership roles.

Preference will be given to children of D and E families. D is a religious ideology and E is
a service organization. Also, preference is given to students who have attended high
school in the state of B for at least two years. Consideration will be given to otherwise
eligible applicants who do not meet the preference criteria.

Relatives of members of the selection committee, your officers, directors, and substantial
contributors are not eligible to receive the scholarship. Scholarships shall be awarded on
an objective and non-discriminatory basis, with neither race, creed, color, sex, age,
national origin, nor disability being considered.

You require that the recipient’s school of choice must be exempt under Section 501(c)(3)
of the Code. Scholarships may be renewed for up to a total of four school years. To be
renewed recipients must maintain a minimum grade point average and provide evidence
of good standing.

You will distribute the scholarship proceeds either directly to the university/college or to
the student. If the funds are distrusted to the school, you will provide a letter to them
specifying that their acceptance of the funds constitutes their agreement to refund any
unused portion of the scholarship if the recipient fails to meet any term or condition of the
scholarship and that they will notify you if the recipient fails to meet any term or condition.
If they will not agree, you will obtain reports and transcripts. If the funds are given directly
to the student, you will require a signed expenditure responsibility agreement and you will
require reports.

You represent that you will (1) arrange to receive and review grantee reports annually
and upon completion of the purpose for which the grant was awarded, (2) investigate
diversions of funds from their intended purposes, and (3) 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 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.

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. The effective
date of our approval is March 5, [redacted], which is the date your request was
submitted.

• 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