IRS approved four-year scholarships for graduating seniors

Plain-English summary

A private foundation proposed four-year undergraduate scholarships for graduating seniors from qualifying high schools in two regions. School representatives would nominate candidates, and a scholarship committee would consider persistence, academic and career potential, recommendations, interviews, and unmet financial need. Award amounts would generally fill the gap between direct education costs and other financial aid, with payments made to the institution or tracked through student accounts and reports. The program also required renewal reviews, final reports, investigations, recovery of diverted funds, and detailed records. The IRS approved the objective and nondiscriminatory procedures under section 4945(g)(1), so qualifying awards would not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation's proposed four-year scholarship selection, payment, and oversight procedures satisfy section 4945(g)?
• Outcome: approved, assuming the program is conducted as proposed
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)(1)

Full text (IRS public release)

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

Release Number: 201936012
Release Date: 9/6/2019
Employer Identification Number:
Date: June 10, 2019

Contact person - ID number:

Contact telephone number:

LEGEND:

UIL: 4945.04-04

C = scholarship
D = state

E = state

F = school 1

G = school 2

H = school 3

J = school 4

K = schools

P = scholars

t dollars = amount
u dollars = amount
v = number
w = number

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)).

Letter 4792 (10-2012)

Catalog Number 58263T

Description of your request
You will operate a scholarship program named C, focused on the geographies of D and

E, to make grants to graduating high school seniors.

You previously focused support on primary schools but wish to expand support to
secondary schools. Initially, the pool of applicants will be limited to graduating high school
seniors of your E charter school grantees. You indirectly support these charter schools
through grants to their respective charter management organizations, namely, F, G, H, J
and K. In the future, you may expand this program to other schools that you support,
directly or indirectly, each being a qualifying high school.

You will provide awards to support specific high school graduates, called P, who will
attend educational institutions that are described in Code Section 170(b)(1)(A)(ii) to allow
such graduates to obtain a degree largely debt free. You primarily intend to award
scholarships to P attending domestic educational institutions.

On a case by case basis, you may award scholarships for students to study at foreign
educational institutions if such educational institution meets the description of an
educational institution described in Code Section 170(b)(1)(A)(ii). If you determine the
applicable foreign institution is an educational institution, before disbursing any funds,
you will thoroughly check the Treasury Department's Office of Foreign Assets Control
terrorist lists and Specifically Designated Nationals list (the "SDN list") to ensure that it
does not inadvertently transfer funds to any inappropriate organization or become
involved with any individuals on the SDN list. Depending on the status of such foreign
institution, you may require expenditure responsibility for any such grant.

You will award scholarships to students who show potential for college and career
success. Each P will not be the "typical" high school leader who achieved early and often.
Rather, a P will be unique among his or her peers in that he or she will have
demonstrated particular persistence, self-discipline, curiosity, conscientiousness, and
motivation. P will have worked hard to achieve academic and social success, even when
progress did not come readily or easily for him or her. The scholarships will afford P an
opportunity that they might not otherwise have had to continue their personal growth in
college.

No P will be required to enroll in any particular undergraduate program or to study any
particular subject. Each P will have the choice to use the scholarship in pursuit of any
course of undergraduate study at an institution he or she so chooses.

You will generally award four-year undergraduate scholarships to graduating high school
seniors with potential for success. The number of awards made annually will be
determined by your Board of Directors based on: (a) the size of the applicant pool; (b) the
qualifications and needs of the candidates; and (c) the funds determined by your Board to
be used to support C. Initially, you will award between v and w scholarships per year,
however, that number may be adjusted based on the above factors.

Letter 4792 (10-2012)
Catalog Number 58263T

Each scholarship is intended to "fill the gap" between a student's direct costs (as defined
below) and federal, state or institutional financial aid he or she receives. Based on this
research, each scholarship will average between t dollars and u dollars per academic
year, with such amount to be adjusted annually to reflect increases in the costs P will
incur. C is not meant to replace other financial assistance available to a P; rather it will
make college a possibility without undue financial stress on the P's family or the need for
student loans.

C will be publicized through the guidance departments of each qualifying high school and
word-of-mouth. Such departments will be made aware of the eligibility criteria.
Candidates will be nominated by representatives at each qualifying high school, including
one or more guidance counselors and/or college advisors and/or one or more teachers
and/or school administrators, each of whom has regular and direct involvement with high
school seniors at each qualifying high school.

Representatives of each qualifying high school will assess potential applicants at their
school to determine which potential applicants will likely satisfy the eligibility criteria. The
Representatives of each qualifying high school will nominate students to apply for the
scholarships via your online application portal, which will be reviewed by your scholarship
committee.

To be considered for an award, a candidate must:

• Be a citizen or permanent resident of the United States

• Be a graduating senior from a qualifying high school with an offer of acceptance to
an educational institution to undertake a four-year course of undergraduate study

• Provide a copy of his or her high school transcript showing his or her coursework
and GPA for all semesters completed

• Provide written recommendations from at least two individuals, one of which must
be from a guidance/college counselor and one of which must be from a teacher or
community leader

• Provide short essays which demonstrate his or her academic potential

• Provide a resume which includes his or her extracurricular activities, work
experience, community service, honors/awards, etc

• Have an unmet financial need with regard to the costs of undertaking a four-year
course of undergraduate study after awards through the Free Application for Federal
Student Aid ("FAFSA") and any other federal, state or institutional aid or scholarships.
• Agree to file the FAFSA and state aid applications annually, if eligible.

• Agree to attend and participate in a personal interview with one or more members
of the scholarship committee

• Agree to attend and participate in specific scheduled events by you for all P.

All scholarships will be awarded on a completely non-discriminatory basis with no
restrictions based on gender, religion, race, creed, age, sexual orientation, national origin
or disability.

Letter 4792 (10-2012)
Catalog Number 58263T

The scholarship committee will review the nominated candidates using the following
criteria, which is reasonably related to the purposes of the scholarships:

• The future potential of the candidate based on the quality of the essay and the
candidate's extracurricular experiences as shown on his or her resume

• The positive written recommendations showing a likelihood of success for
undergraduate study

• Financial need of the candidate based on the candidate's FAFSA Student Aid
Report, any Federal, state or institutional aid, any scholarships awarded and any
special personal or family circumstances affecting the candidate's financial need

• The discussions of your scholarship committee with representatives at each
qualifying high school regarding the candidate

• The conclusions from the reports of the personal interview with the candidate by
one or more members of your committee regarding such candidate's
demonstrated determination to succeed in college and life and such candidate's
capability to continue education through a four-year course of undergraduate study

On the basis of your committee’s review of the above criteria, it will select recipients and
subsequently determine the amount of each scholarship. The amount of each scholarship
will generally be based on the difference between (1) the direct costs of the course of
study, and (2) the aggregate amount covered by financial aid awards, FAFSA, or any
other equivalent federal, state or institutional financial aid and other scholarships.

On a case by case basis, applicants may request and you may provide additional
financial assistance to P, if you determine the additional financial assistance requested is
reasonable and necessary to enable P to complete his or her degree (or will complement
and broaden the P's experience in pursuing his or her degree).

The terms and conditions of each scholarship will be set forth in a letter agreement sent
to each P. The P will be required to acknowledge his or her receipt and consent to the
terms and conditions of the scholarship. The letter will include the following: (a) the
purpose of the scholarship; (b) the duration of the scholarship; (c) the total amount of the
scholarship; (d) requirements to renew the scholarship, including periodic required
reports and attendance your events (as further described below); and (e) an agreement
to return any unused or misused funds.

To the extent possible, scholarships will be paid by you directly to the relevant institution.
If some or all of the funds awarded cannot be paid directly to the institution, you will pay
such funds to P's personal college account or to P directly to be used to meet his or her
direct costs. In either case, P will be required to provide periodic statements throughout
the year, at least one at the end of each semester and one at the end of the scholarship,
showing how the scholarship funds have been spent.

Letter 4792 (10-2012)
Catalog Number 58263T

Each P is expected to participate in specific scheduled events. Events will likely include

welcome receptions & college send-offs, and year-end celebrations. This will present an

opportunity for you to check-in with P and ask in what ways their high school experience

has or has not prepared them for college and what they think could be done differently or
better.

Mid and end-year reports will be provided by P. This will include transcripts, receipts or
expenditures, and a renewal application if applicable. To apply for renewal of the
scholarship, P must submit the following: (1) an updated copy of his or her transcript,
verified by his or her educational institution; (2) proof of proper expenditure of scholarship
funds paid directly to P; and (3) P's most recent FAFSA Student Aid Report and any
other relevant updated financial information/awards.

Your scholarship committee will review each renewal application to ensure all
requirements are met and will decide whether or not each such scholarship should be
renewed based on satisfaction of the above criteria.

At the completion of his or her studies, P will be required to submit a final report, provide
a copy of his or her final academic transcript, and submit receipts or other proof of proper
expenditure of any scholarship funds paid directly to him or her.

If a P fails to submit a report after a reasonable time elapses from its due date or a report
or conversation with the P leads to a possibility that all or any part of the scholarship
funds have not been used for the purposes of C, you will initiate an investigation. While
an investigation is active you will, to the extent possible, withhold any further payments
until it has determined that no part of the scholarship has been used improperly and until
any outstanding reports have been submitted.

If after a thorough investigation, you conclude any part of the scholarship has been used
improperly, you will take all reasonable and appropriate steps to recover diverted funds or
to ensure that such diverted funds are restored and dedicated to the purposes being
financed by the scholarship. These steps will include legal action unless such action
would probably not result in the satisfaction of execution of a judgment.

If you determine any part of the scholarship was used for improper purposes and P has
not previously diverted grant funds to any use not in furtherance of a purpose specified in
the scholarship, you will withhold further payments on the particular scholarship until: (1)
it receives P's assurances, in writing, that future diversions will not occur (2) any
delinquent reports have been submitted to your satisfaction and (3) P agrees to take
extraordinary precaution to prevent future diversions from occurring, for example, by
scheduling a check-in call once per month or more frequent reports. In each case, any
diverted funds must be recovered and restored before any further payments are made.

You will maintain the following as part of its corporate records: (1) information used to
evaluate the qualifications of candidates (to ensure funds are used in furtherance of the
purposes of C); (2) identification of P (including names, addresses and any relationship of

Letter 4792 (10-2012)
Catalog Number 58263T

any P to you) and the amount and purpose of each scholarship; and (3) all P reports and
other follow-up data obtained in administering C, including information related to
investigating jeopardized 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.

• 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.

Letter 4792 (10-2012)
Catalog Number 58263T

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