IRS approves scholarships for local high school seniors

Plain-English summary

A private foundation proposed scholarships for graduating seniors at two local high schools. Different awards would consider criteria such as a chosen field of study, participation in sports or clubs, charitable activity, disability, financial need, or difficult personal circumstances. High school counselors would select recipients objectively and without discrimination, and students would have to verify college or trade-school registration before receiving funds. The foundation also described procedures for monitoring use of the awards and recovering diverted funds. The IRS approved the procedures under section 4945(g)(1) and stated that awards used for qualified tuition and related expenses would not be taxable to recipients under section 117.

Ruling snapshot

• Question: Do the foundation's procedures for awarding scholarships to local high school seniors qualify for advance approval?
• Outcome: approved
• Key authorities: IRC §§ 117, 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

Number: 202007020
Release Date: 2/14/2020                           Employer Identification Number:

Date: November 18, 2019                          Contact person - ID number:

                                                 Contact telephone number:

Legend:                                          UIL:
b = number                                       4945.04-04
c dollars = amount
d dollars = amount
e 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. 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

You will operate a program providing b scholarships to two local high schools. They will
be made available to graduating seniors and awarded, based on the scholarship, to those
who meet the specific requirements of the particular award. Scholarships will be in the
amount of c or d dollars, for a total of e dollars.

To be eligible students must meet one of the following:

• Furthering study in a certain field, such as medicine
• Participated in a certain school sport, such as wrestling
• Has participated in a certain activity or club
• Has been active in charitable works
• Has a disability
• Has a great financial need
• Has had difficult circumstances to deal with growing up

Other criteria may be considered such as past academic performance, performance on
tests designed to measure ability and aptitude for college work, recommendations from
instructors, financial need, character, or the conclusions that the selection committee
(school counselors) might draw from personal interviews.

You will publicize your scholarship on the high school’s website and require verification
that the advertisements have been posted on their website. The current members of your
selection committee are the high school counselors. Scholarships will be awarded on an
objective and nondiscriminatory basis.

Steps will be taken to ensure that procedures are in place to verify that scholarship
recipients have performed the activities that the grants/scholarships are intended to
finance and that no funds have been diverted away from the original purpose. Qualified
education expenses include tuition and fees, as well as course-related expenses such as
books, supplies, and equipment. The scholarships have a term of one academic year.

In order to receive funds, a recipient will be required to verify that he/she has successfully
registered for a semester of college or trade school. In most cases, the funds for each
scholarship will be paid by one payment at the beginning of the semester. This is
required in order to prevent scholarship funds from being misappropriated.

You will take all reasonable and appropriate steps to ensure that scholarship funds are
spent appropriately. If you receive information indicating that a scholarship recipient has
violated the terms, you will take all reasonable and appropriate steps to recover the
diverted funds.

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.

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