Scholarship for economically challenged graduates received approval

Plain-English summary

A private foundation proposed a scholarship for graduates of a specified school program who had overcome economic challenges and been accepted by a highly ranked out-of-state university. The award could cover tuition and also supplies, transportation, travel, and living expenses not covered by other aid. A five-member committee would use academic goals, grades, career plans, and financial need, with possible preference for first-generation college students. Recipients had to provide grades, progress letters, receipts, and reconciliations, while the foundation would investigate misuse and maintain grant records. The IRS approved the procedures under sections 4945(g)(1) and 4945(g)(3), so compliant expenditures would not be taxable to the foundation.

Ruling snapshot

• Question: Did the foundation's scholarship and educational-grant procedures satisfy the advance-approval requirements of section 4945(g)?
• Outcome: Approved for the described program, assuming it is conducted as proposed.
• Key authorities: IRC §§ 74(b), 117, 170(b)(1)(A)(ii), and 4945(g); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

Transcriber's note: this document is a five-page scan. All page images were checked. Obvious OCR errors in bullet symbols, merged words, and form layout were corrected by comparison with the images. Redacted blank spaces are identified where needed. Original grammatical and typographical irregularities are preserved. The wording is otherwise verbatim.

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

Release Number: 201926020
Release Date: 6/28/2019 Employer Identification Number:
Date: April 1, 2019

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
M = Name

N = School

P = Program

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 and educational grants.
Based on the information you submitted, and assuming you will conduct your
program as proposed, we determined that your procedures for awarding
scholarships and educational grants meet the requirements of Code Sections
4945(g)(1) and 4945(g)(3). As a result, expenditures you make under these
procedures won't be taxable.

Also, Section 4945(g)(1) 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 M.

Your purpose is to make grants to public charities to support programs that educate,
protect, comfort, and enrich the lives of children in your state by helping these children to
become confident and productive adults.

The purpose of M is to award scholarships to N seniors that have graduated from P who
have shown the passion to succeed despite facing economic challenges. Because many
students receive insufficient funds to cover basic tuition and fees for the school, you will
make a grant to cover some or all of the student’s expenses. M was designed to help
students cover costs of critical needs not covered by academic scholarships or Pell
grants and will cover expenses described in Section 4945(g)(1) such as tuition as well as
expenses described in 4945(g)(3) such as expenses for basic supplies, transportation,
travel and living expenses. Each scholarship will be approximately x dollars per year with
one half of the award applied to each semester. Initially, one scholarship will be granted
each year, although this may increase with the success of the program and needs of the
graduates.

To promote M, you will provide relevant information and copies of the application to high
school guidance counselors and administrators. Applicants must submit the completed
application with required attachments including a copy of their personal statement, a
letter of recommendation from a teacher in a core subject, and an essay as well as
transcripts, standardized test scores, and a copy of their college of choice acceptance
letter. Furthermore, applicants must have been accepted to a top-ranking out-of-state
university prior to applying for the scholarship and have a financial aid package submitted
to the university.

Your selection committee will be appointed by your board of directors and will initially
consist of two members of your board of directors and three members of N, including the
president, principal, and the assistant principal who also serves as the director of P. The
selection committee will award each scholarship using objective criteria including the
applicant’s course of study, grade point average, career objectives, and financial need. It
is anticipated that a preference will be given to those students who will be the first person
in their family to attend a college or university.

A student may apply for a renewal of the scholarship. To qualify for renewal, the recipient
must:

• Maintain the GPA requirement set forth by you.

• Send a transcript to you at the end of each semester showing current grades and
GPA.

• Send a letter to you at the end of each semester to share their progress, thoughts
and challenges.

• Send you receipts for all the funds used and a reconciliation to the award granted.

Moreover, you may require the student to take part in a campus work study program in
their freshman and sophomore years.

You will generally provide the scholarship funds to the school. You may also purchase
basic supplies for the students recommended by their school or contribute to their student
account.


You will arrange to receive a report of the student’s courses taken and grades received in
each academic period. You will require that the report be verified by the educational
institution attended by the student and will be obtained at least once a year. Upon
completion of the student’s study, you will also obtain a final report.

Where the reports or other information, including the failure to submit reports, indicates
that any or all part of the grant is not being used in furtherance of the purposes of the
grant, you will conduct an investigation. While conducting this investigation, you will
withhold further payments to the extent possible until any delinquent reports have been
submitted.

You have indicated you will (1) arrange to receive and review grantee reports
periodically, to ensure compliance with the purpose of the grant, (2) make tuition
payments or payments for housing directly to the educational institution when possible,
(3) distribute and ensure grant funds held by the grantee are used for their intended
purposes, (4) investigate any perceived diversions of funds from their intended purposes
and ensure such actions do not occur in the future, and (5) receive donations from a
limited number of donors who are supportive of your program and provide appropriate
documentation and reporting to donors.

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 Section 117(a) and is to be used for
study at an educational organization described in Section 170(b)(1)(A)(ii); or

- A prize or award subject to the provisions of Section 74(b), if the recipient of
the prize or award is selected from the general public; or

- To achieve a specific objective; produce a report or similar product; or
improve or enhance a literary, artistic, musical, scientific, teaching, or other
similar skill or talent of the recipient.

Under 4945(g)(3), to receive approval of its educational grant procedures, Treasury
Regulations Section 53.4945-4(c)(1) requires that a private foundation show:


• The grant procedure includes an objective and nondiscriminatory selection
process.

• The grant procedure results in the recipients performing the activities the grants
were intended to finance.

• The foundation plans to obtain reports to determine whether the recipients have
performed the activities that the grants were intended to finance.

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.

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