Foundation's memorial scholarship procedures for relatives of insurance agents approved under 4945(g)

Plain-English summary

A private foundation received advance IRS approval of its scholarship grant procedures under Code Section 4945(g), which spares the foundation the Section 4945 excise tax that otherwise applies to grants to individuals for study. The program (B in the legend) is a memorial scholarship created in honor of an individual (C) to help a first-year post-secondary student who shows customer service, ambition, and drive offset tuition. Eligibility is limited to children, grandchildren, nieces, and nephews of insurance agents and carriers in a particular state (D) who have a working relationship with a specified organization (E); those agencies nominate candidates, who then submit an application, high school transcript, and a 500-word essay. To keep the selection unbiased, the applications are reviewed blind (the nominating agency is not identified on the form) by a selection committee that includes board members, an unaffiliated higher-education professional, and members from E with no knowledge of the individual agencies; the committee narrows the field and scores applicants, and the top scorer receives one nonrenewable award. The foundation committed to the standard oversight and recordkeeping duties and to not funding insiders or their relatives. Finding the procedures objective and nondiscriminatory and the award used for study at a qualified institution, the IRS approved them under Section 4945(g)(1), effective October 27, 2016, so the grant is not a taxable expenditure and is a tax-free scholarship under Section 117 when used for qualified expenses. The approval applies only to this foundation.

Ruling snapshot

• Question: Do the private foundation's scholarship grant procedures qualify for advance approval under Code Section 4945(g)(1) so the awards are not taxable expenditures?
• Outcome: approved (procedures meet § 4945(g)(1); grants are not taxable expenditures and are excludable scholarships/fellowships under § 117(a) if used for qualified expenses)
• Key authorities: IRC §§ 4945(g)(1), 117(a)-(b), 170(b)(1)(A)(ii), 170(c)(2)(B)

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR. OCR bullet markers rendered "e" were restored to bullets where used; wording is otherwise verbatim, and redacted legend placeholders appear as the IRS released them.

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

Number: 201911014 Employer Identification Number:

Release Date: 3/15/2019
Contact person - ID number:

Date: December 20, 2018 Contact telephone number
LEGEND . UIL: 4945.04-04

B= Program

C= Individual

D= State

E= Organization
x dollars= Amount
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 B. The purpose of B is
to help a student, who has demonstrated the characteristics of customer service,
ambition and drive, offset tuition expenses for his/her first year of post-secondary
education. B is created in the honor of C. C touched a great number of lives in compelling
ways through her own natural talents, ambition and drive, and with an uncommon
commitment to help others. The ideal recipient like C will be someone who has overcome
obstacles and attained goals through perseverance, hard work and a genuine belief in
themselves, as well as in others.

Letter 4792 (10-2012)
Catalog Number 58263T

The scholarship is only available to children, grandchildren, nieces, and nephews of
agents and carriers in D with a working relationship with E. You will provide promotional
materials and scholarship applications to these insurance agencies and carriers who will
nominate candidates. All nominees are then required to complete the application, provide
a copy of their high school transcript and complete a 500-word essay describing
themselves, their aspirations and how they embody the values associated with C by a
predetermined due date. In addition, the nominating individual is required to provide a
written statement about their relationship to the nominee.

All applications will be reviewed by your Selection Committee which will include members
of your board, and an individual with a background in higher education with no affiliation
to you. Furthermore, the remaining members will be from E, who will have no interaction
or knowledge of the individual insurance agencies. In addition, to insure an unbiased
selection, the insurance agency affiliation is not designated anywhere on the application
form, so the applications are blind to the committee.

After reviewing the applications for completeness and neatness, members of the
Selection Committee will pare them down to the most qualified five individuals based on
their academic performance as well as the quality of the written essay. Each committee
member will then identify their top three choices. The applications are weighted based on
a ranking system you have developed. The recipient with the highest numerical score is
awarded the scholarship. You will base the size of the scholarship on your financial
resources. You will also strive to be consistent with other charities who award similar
scholarships to determine an appropriate size. Currently, you plan to award one
nonrenewable scholarship award for x dollars.

When the winner is identified, they are required to provide a letter on company letterhead
from the sponsoring agency, identifying the relationship, to receive the scholarship. You
will request a copy of the student's first semester tuition bill as proof of enrollment.

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 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 diversion from
occurring.

You represent that you will maintain the following: (1) 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 purpose of each grant, and (4)
establish that you undertook the supervision and investigation of grants described above.

Basis for our determination

Letter 4792 (10-2012)
Catalog Number 58263T

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.

The effective date of this ruling is October 27, 2016.

Please keep a copy of this letter in your records.

Letter 4792 (10-2012)
Catalog Number 58263T

4

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