Scholarship procedures for association members’ descendants approved

Plain-English summary

A private foundation proposed scholarships for children and grandchildren of association members who had maintained membership for at least three years and were current on dues. Applicants had to be applying to or attending an accredited college and submit transcripts, test scores, recommendations, an essay, and information about community and extracurricular involvement. A three-member board committee would select recipients, while relatives of insiders and selection-committee members were ineligible. Recipients had to verify educational expenditures within 180 days and repay misused or unverified funds. The IRS approved the procedures under section 4945(g)(1), so scholarships awarded as proposed would not be taxable expenditures.

Ruling snapshot

• Question: Did the foundation’s procedures for scholarships to association members’ children and grandchildren satisfy section 4945(g)(1)?
• Outcome: approved, assuming the program is conducted as proposed
• Key authorities: IRC §§ 117(a), 117(b), 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g)(1)

Full text (IRS public release)

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

Number: 201919018 Employer Identification Number:

Release Date: 5/10/2019
Contact person - ID number:

Contact telephone number:
Date: February 12, 2019

LEGEND: UIL:
b dollars = amount 4945.04-04
c = number
D = association

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
You will operate a program providing scholarships to the children and grandchildren of
members of D. You expect to provide c scholarships of b dollars.

The specific criteria you use to determine who is eligible for your program are:

1. Children or grandchildren of D members. Members must have maintained their
   relationship with D continuously for at least three years. Members must be current
   with respect to dues.

Letter 4792 (10-2012)
Catalog Number 58263T

2. Applicants must have applied to at least one accredited two or four-year college,
   or are currently enrolled in college to be considered. Evidence of application is
   required.

3. Applicants must submit all materials to you by the deadline date on or before April
   1.

4. All scholarship awards will be paid directly to the applicant.

Individuals meeting the above criteria must submit an application meeting the following
specifications:

1. Applicants must submit a high/college school transcript.

2. Applicants must submit a photocopy of their ACT or SAT scores. Applicants with
   scores in the 80th percentile or above will receive preference.

3. Applicant must submit three letters of recommendations. Sources for the
   recommendation letters are:

   a) high or college school teacher,
   b) member of applicant’s general community,
   c) source of applicant’s choice.

4. Applicants must submit a 250 - 300 word essay describing achievement goals they
   have for their college experience. The essay should also briefly describe career
   goals. Subject of essay is non-specific, to give applicant the opportunity to express
   his/her creativity.

5. Applicants are encouraged to include any community involvement and extra-
   curricular activity.

A scholarship committee to select winners will consist of three members from your board
of directors. Winning applicants will be notified of the amount of scholarship by mail.

Scholarships are advertised in the membership newsletter, and copies of the application
and announcement materials can be found on your website. Relatives of members of
your selection committee, or of your officers, directors, or substantial contributors are not
eligible for awards made under your program.

You will maintain case histories showing recipient names and addresses, purpose of
award, amount, and manner of selection. All successful candidates must provide
verification of their expenditures within 180 days of receiving their scholarship. The
scholarship committee will evaluate and confirm whether funds have been used
appropriately and specifically for educational purposes. Should the recipient fail to
provide verification of expenses and/or if the committee deems funds were misused, the
recipient and/or the sponsoring parent or grandparent will be responsible to reimburse
those funds within thirty days of such notification.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

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.

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.

4. How you established supervision and investigation of 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 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.

Letter 4792 (10-2012)
Catalog Number 58263T

• 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

Letter 4792 (10-2012)
Catalog Number 58263T