Independent-school scholarship procedures approved

Plain-English summary

A private foundation proposed scholarships for students in prekindergarten through grade 12 who attended or had been accepted by independent schools in four counties. Applicants would be evaluated on financial need, test scores, academic performance, extracurricular activities, essays, interviews, and recommendations. Awards would be paid directly to schools and conditioned on satisfactory academic progress, while an independent selection committee and multiple screening steps would exclude disqualified persons. The IRS approved the procedures under section 4945(g)(1), so qualifying awards would not be taxable expenditures and could be tax-free to recipients when used for qualified tuition and related expenses.

Ruling snapshot

• Question: Did the foundation's independent-school scholarship procedures satisfy the advance-approval requirements?
• Outcome: Approved.
• 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

Number: 201951006 Employer Identification Number:

Release Date: 12/20/2019
Contact person - ID number:

Date: September 24, 2019 Contact telephone number:
LEGEND UIL: 4945.04-04

T = Number

U = County

W = County

X = County

Y = County

Z = State

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 provide in Code Section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program. The purpose of your
scholarship program is to award scholarships to students in grades Pre-K through 12th
grades who are enrolled in or have been accepted by independent schools located in U,
W, X, and Y counties.

Letter 4792 (10-2012)
Catalog Number 58263T

Scholarships will be used for qualified educational purposes such as tuition, fees and
purchase of required course materials at the independent schools. You will publicize the
scholarship program in independent schools located in U, W, X, and Y. To apply for a
scholarship, students will complete an application and submit it to the school he/she is
attending or enrolled. The schools forward the applications to you.

You select scholarship recipients from eligible applicants. You expect approximately T
students to apply for the scholarships and estimate that 30 percent will be selected each
year. Selection criteria includes:
• Financial need
• Test scores
• Prior academic performance
• Participation in extracurricular activities
• Essays and interviews, and
• Recommendations from applicant’s teachers, coaches and mentors.

Your governing board will determine the number and amount of scholarship awards each
year based on your available resources and the ranking of students’ applications.

You will disburse scholarship awards directly to the schools in which the recipients are
attending or enrolled to be credited to the students’ accounts to be used only for qualified
educational purposes. Funds are only to be applied if the student remains in satisfactory
academic performance and remains in academic good standing. This means the student
is on track to complete all requirements necessary to advance to the next grade level and
has a cumulative grade point average of 2.0 or better (or the equivalent thereof based on
the schools grading system). In addition, you will request progress reports from the
schools confirming the recipients academic good standing and accounting of the
scholarship proceeds.

Your selection committee is comprised of individuals who are not able to derive a private
benefit, directly or indirectly, from any potential recipient. Disinterested members of the
governing board or other disinterested persons selected by you, who have no business or
familial relationships with applicants, make up the selection committee.

You ensure that the terms of the scholarship award cannot be violated through your
method of disbursement to the schools directly. You will take the following steps to
ensure that no scholarships are made to disqualified persons:

• The scholarship application and instructions state that disqualified persons are
ineligible to apply for the scholarship.

• All applications will be inspected to ensure that no applicant is a disqualified
person. You will maintain a list of disqualified persons. If it is discovered an
applicant is a disqualified person, that applicant’s application will be returned to
him/her with a letter stating that they are ineligible to apply because they are a
disqualified person.

Letter 4792 (10-2012)
Catalog Number 58263T

• A list of tentative scholarship recipients will be distributed among the governing
board for review to ensure that no disqualified person is included on the lists. If a
disqualified person is found, applicant's application will be returned with a letter
stating that they are ineligible to apply because they are a disqualified person. No
potential scholarship recipient will receive notice of their award or receive funding
until you confirm the selectee is not a disqualified person.

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 the 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 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 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.

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

Letter 4792 (10-2012)
Catalog Number 58263T