Revolving educational loan procedures approved

Plain-English summary

A private foundation proposed a revolving educational loan program for needy and deserving students under age 23 who lived in a specified area. Loans could support study at U.S. trade, technical, professional, and collegiate institutions, with preference for self-supporting applicants. Schools would receive the funds directly, borrowers would sign interest-bearing notes backed by guarantors, and repayment would begin after study ended or a specified period following high school completion. The foundation would review annual reports, investigate diversions, recover misused funds, withhold further payments when necessary, and maintain detailed records. The IRS concluded that these long-term, low-interest educational loans qualified under section 4945(g)(3), making expenditures under the approved procedures nontaxable.

Ruling snapshot

• Question: Do the foundation's procedures for long-term, low-interest educational loans satisfy section 4945(g)(3)?
• Outcome: approved
• Key authorities: IRC §§ 117(a), 170(b)(1)(A)(ii), 4945(g)(3); Treas. Reg. § 53.4945-4(c)(1); Rev. Rul. 77-434

Full text (IRS public release)

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

Number: 202015029
Release Date: 4/10/2020 Employer Identification Number:

Contact person - ID number:

Date: January 16, 2020
Contact telephone number:

LEGEND UIL: 4945.04-04

W = Name

X = Geographic area
y dollars = Amount

z dollars = Amount

Dear

You asked for advance approval of your educational loan procedures under Internal
Revenue Code (IRC) Section 4945(g)(3). This approval is required because you are a
private foundation that is exempt from federal income tax.

Our determination

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

Description of your request
Your letter indicates that you will operate an educational loan program called X.

Your purpose is to provide educational loans.

The purpose of X is to provide student loans to the needy and deserving students residing
in Y. Other things being equal, self-supporting applicants are preferred.

X is publicized in the local newspaper.

Students, male or female, with or without a high school diploma residing in Y that have not
attained age 23 before August 31 of the school year are eligible for X.

The number of loans made annually is determined based on the number of applicants and
the amount required to be distributed under IRC Section 4942. No additional conditions are
required to obtain, maintain, or qualify for renewal of a loan.

Loan funds are given directly to the school that each recipient will be attending before the
beginning of their fall semester. If a student does not attend the school the loan is paid to,
the school will refund the money to you.

Your loan selection committee currently consists of a                     ,
                       ,                       , and                      . Committee members must be from Y.
Replacement members are identified and selected by current loan selection committee
members.

The loan funds will be safeguarded and administered in a business-like manner. The loan
recipient should regard the loan as an obligation that must be met when due. The loan
funds are revolving and their benefits are bestowed upon needy students in proportion to
the promptness with which that loans are repaid. It is only by adhering to business-like
methods and procedures that the purposes of the donations may be most fully and
effectively realized.

The maximum loan per student is y dollars per year and z dollars in total. A new application
is required each year.

The purpose of the loan is to secure an education in trade, technical, and professional
schools and colleges in the United States. A four-year course is not required.

An applicant does not have to be a high school graduate, but such graduation is preferred.

Each applicant who receives funds from you will be required to execute a note bearing
interest of    % per annum, payable annually. Repayment of the loan in the event of default
by the borrower (applicant) must be guaranteed by a responsible individual who certifies
his/her agreement to repay the loan if necessary.

Loan recipients shall pay interest on the unpaid principal balance at the rate of    % per
annum each year beginning November 1st of the first year of the loan and continuing
thereafter on November 1st of each year until the loan(s) are due for an amortized
repayment of principal. Amortized loans will be payable at the rate of    % per annum in
monthly installments of $       (principal and interest) commencing upon the earlier of the
following: (1) six months after applicant has completed or discontinues the course of study
for which the loan was made; (2) five years after the date of applicant's high school
graduation or receipt of General Education Development (GED).

Applications must be submitted by June 15th preceding the school year for which that loan
is sought. One reference is also required by June 15th from an unrelated acquaintance
from the applicant's home community. Applications received after June 15th will not be
considered.

When a student has been approved for a loan by the advisory committee, your Trust Officer
continues with the loan arrangements and payments to the students.

Letter 4779 (10-2012)
Catalog Number 58222Y

If a loan is made to an applicant, the applicant agrees to keep your Trustee informed as to
the applicant’s progress in school, and, to notify the Trustee of any address change.

You will maintain case histories showing recipients of your loans, including names,
addresses, purpose of awards, amount of each loan, manner of selection, and relationship
(if any) to officers, trustees or donors to you.

You will arrange to receive and review loan reports annually and upon completion of the
purpose for which the loan was awarded, investigate diversions of funds from their intended
purposes, and take all reasonable and appropriate steps to recover diverted funds, ensure
other loan 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 will maintain all records relating to individual loans, including information obtained to
evaluate grantees, identify whether a grantee if a disqualified person, establish the amount
and purpose of each grant, and establish that you undertook supervision and investigation
of the loans.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(IRC 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 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 IRC Section 117(a) and is to be used
for study at an educational organization described in IRC Section
170(b)(1)(A)(ii); or

- A prize or award subject to the provisions of IRC 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.

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.

Letter 4779 (10-2012)
Catalog Number 58222Y

Long-term, low-interest loans that private foundations make for educational purposes can
be considered grants under IRC Section 4945(g)(3) and Revenue Ruling 77-434, 1977 2
C.B. 420.

Other conditions that apply to this determination

This determination covers only the loan program described above. This approval will
apply to succeeding loan programs only if their standards and procedures don’t differ
significantly from those described in your original request. The effective date of our
approval is April 29, 2019, which is the date your request was submitted.

This determination applies only to you. It may not be cited as precedent.

You cannot rely on the conclusions in this letter if the facts you provided have
changed substantially. You must report any significant changes in 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 make loans 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 must
further the purposes of your organization. You cannot award grants for a purpose
that is inconsistent with IRC Section 170(c)(2)(B).

You should keep adequate records and case histories so that you can substantiate
your loan distributions with the IRS if necessary.

Please keep a copy of this letter in your records.

If you have any questions, please contact the person listed at the top of this letter.

Sincerely,

Steve Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4779 (10-2012)
Catalog Number 58222Y