IRS approves a private foundation's scholarship procedures

Plain-English summary

A private foundation proposed scholarships for high school seniors who belong to a tax-exempt financial cooperative and plan to attend an accredited college, university, community college, vocational college, or technical college. Recipients would be selected on merit using applications, essays, academic records, recommendations, activities, service, achievements, and honors. The scholarships would be nonrenewable, paid directly to the recipient's school, and unavailable to insiders and their children or grandchildren. The foundation also committed to monitor the grants, investigate diversions, recover misused funds, and maintain detailed records. The IRS approved the procedures under section 4945(g)(1), so expenditures made under the program as described would not be taxable expenditures.

Ruling snapshot

• Question: Do the proposed scholarship procedures qualify for advance approval under section 4945(g)(1)?
• Outcome: approved (scholarships awarded under the approved procedures would not be taxable expenditures)
• Key authorities: IRC §§ 117(a), 117(b), 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g)(1), 501(c)(14)

Full text (IRS public release)

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

Number: 202017029
Release Date: 4/24/2020

Employer Identification Number:

Date: January 30, 2020
Contact person - ID number:

Contact telephone number:

LEGEND                                      UIL
M = Name                                    4945.04-04
x = Number

y dollars = Amount

Dear

You asked for advance approval of your scholarship grant procedures under
Internal Revenue Code (IRC) 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 IRC 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 IRC Section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program. Your program will involve
providing scholarship grants to high school seniors who are members of M, which is
recognized as exempt under IRC Section 501(c)(14).

To be eligible to apply for a scholarship, students must meet the following criteria:

• Be a member of M;

• Be planning to attend an accredited college or university, or two- to four-year
  community, vocational, or technical college;

• Be a full-time or part-time student;

Letter 4792 (10-2012)
Catalog Number 58263T

• Cannot be a previous recipient of the scholarship;

• Cannot be an employee, director, or committee member (or child or grandchild
  thereof) of you or M.

Your program is publicized through a website, statement messaging by M, lobby displays
at M’s facility, direct mail, newsletters, and email.

The selection of recipients will be based on merit. Students must submit a completed
application, essay, academic records, and letters of recommendation. Applicants must
describe their participation in co-curricular activities and service to the community as well
as their achievements and honors.

The number and amounts of the individual scholarship will be determined annually by
your board of directors. In making such determination, the board will consider the level of
funding as well as other charitable purposes in which you will be engaged. You expect
that x scholarships in the amount of y dollars each will be available to start your program.

Your scholarships are non-renewable. Each scholarship is awarded in one single
payment. You will condition the disbursement on the recipient enrolling at their selected
post-secondary education institution.

You will make scholarship awards payable directly to college or university that student
attends. The scholarship recipient will be required to provide a fee statement from their
selected post-secondary education institution. You will send payment to the school with a
copy of the fee statement and an explanatory letter that it is in fulfilment of a scholarship
award to the student and is to be applied to the amount due the school by the student.

Your selection committee will be appointed by your board of directors. Your bylaws
provide that the members of a committee appointed by the board may be, but are not
required to be, members of your board. You intend to appoint selection committee
members for one-year terms.

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, and (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.

Letter 4792 (10-2012)
Catalog Number 58263T

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 the provisions of IRC Section
  117(a).

• The grant is to be used for study at an educational organization described in IRC
  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 IRC 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.

Letter 4792 (10-2012)
Catalog Number 58263T

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T