Foundation's four-year scholarships for local students approved

Plain-English summary

A private foundation proposed renewable scholarships for financially needy high school seniors from three counties who planned to attend public universities in their state. Eligible applicants also had to show strong academics, significant obstacles overcome, financial need through the FAFSA, and community service. An experienced administrator would screen applications, and a committee made up of the founder, family members, and one other person would choose recipients, with a preference for first-generation college students. Payments would go directly to university financial aid offices, and renewal required full-time enrollment, a 3.0 grade-point average, and an annual growth essay. The IRS approved the procedures under section 4945(g)(1), so compliant awards would not be taxable expenditures and could be tax-free scholarships when used for qualified tuition and related expenses.

Ruling snapshot

• Question: Do the foundation's renewable college scholarship procedures qualify for advance approval under section 4945(g)(1)?
• Outcome: approved, compliant scholarship payments will not be taxable expenditures
• Key authorities: IRC §§ 117(a) and (b), 170(b)(1)(A)(ii), 170(c)(2)(B), 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: 201942014
Release Date: 10/18/2019 Employer Identification Number:

Date: July 22, 2019
Contact person - ID number:

Contact telephone number:

UIL:
LEGEND 4945.04-04
B= Name
C = Location
D= State
w = Number

x dollars = Dollar Amounts
y = Number Range

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.

Letter 4792 (10-2012)
Catalog Number 58263T

The purpose of B is to assist financially needy high school seniors in the C area. B will
cover the costs of tuition, fee, books, equipment and supplies to enable the recipients to
attend the state university of their choice in D in order to obtain an undergraduate college
education.

Under B, you plan to award a maximum of w renewable scholarships each year for an
annual amount in the range of x dollars over four years, based on the quality of the
applications that you receive. In addition, the amount of the award is based on current
tuition costs in D and the amount of the award may be increased if the cost for in-state
tuition and fees in the D system increases.

To be eligible to apply, students must be:

• U.S. citizens or permanent residents of the United States;

• Residents of one of three specific counties in the C metropolitan area;

• Current high school seniors enrolled in these counties’ public or private high
schools;

• Planning to attend one of the public universities in D as a fulltime undergraduate
student;

• High academic achievers who have overcome significant obstacles in life;

• Able to show financial need as demonstrated through the FAFSA report;

• Able to show involvement in the community through volunteer service.

To promote B, you will send information directly to the counselors in the targeted high
schools and to their supervisors in the administrative offices. Students also learn about B
through free internet scholarship sites.

To apply for B, students must submit an application package with necessary attachments
such as transcripts, references and financial information. Students must also submit an
essay addressing how they have overcome a major obstacle in their life.

All applications will initially be screened by your scholarship administrator who has
substantial experience in administering scholarships in C. The scholarship administrator
will then select in the range of y semifinalist applications for review by the selection
committee which is made up of your founder and their family members plus one more
person. The selection committee will choose the best qualified applicants based on the
strength of their application and their demonstrated financial need. Preference will be
given to students who are the first generation in their family to attend college.

All scholarship payments are made to university financial aid offices, not to the recipients.
The universities must also agree to return any of unused scholarship funds to you.

Furthermore, the scholarships under B are renewable annually for an additional three
years as long as the recipient:

• Maintains fulltime status at the school which is at least 12 credit hours;

Letter 4792 (10-2012)
Catalog Number 58263T

• Provides a transcript after each academic year showing a GPA of 3.0;
• Provides an essay assessing their personal, academic and professional growth
over that academic year.

Recipients must also graduate with an undergraduate degree in four years or less.
However, if a recipient has extenuating medical or personal issues, the scholarship may
be suspended for a year while those issues are resolved.

You represent that you will arrange to receive and review grantee reports annually and
upon completion of the purpose for which the grant was awarded, investigate diversions
of funds from their intended purposes, and 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 relating to individual grants, including
information obtained to evaluate grantees, identify whether a grantee is a disqualified
person, establish the amount and purpose of each grant, and establish that you
undertook the supervision and investigation of 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:

Letter 4792 (10-2012)
Catalog Number 58263T

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

Letter 4792 (10-2012)
Catalog Number 58263T