IRS approves scholarships for graduates of rural high schools

Plain-English summary

A private foundation proposed a scholarship program for graduates of three rural high schools attending qualifying post-secondary institutions. Awards would cover remaining attendance costs after family contributions and other aid, subject to an annual cap. A committee would consider enrollment, academic performance, test results, recommendations, financial need, interviews, and personal qualities. Scholarships would be paid through the school or an existing scholarship fund, could be renewed for up to three additional years, and would be monitored for misuse. The IRS approved the procedures under section 4945(g)(1), so grants made under them would not be taxable expenditures and qualified educational use could be tax-free to recipients under section 117.

Ruling snapshot

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

Full text (IRS public release)

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

Number: 202021022
Release Date: 5/22/2020

Employer Identification Number:

Date: February 26, 2020
Contact person - ID number

Contact telephone number:

LEGEND UIL: 4945.04-04
B = Name
C = State

D = Organization
x 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 provided in Code Section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program called B. The purpose of B is
to improve post-secondary education opportunities for high school students in rural
counties in C for study at a qualifying post-secondary educational institution. B will also
further your goal of ensuring that no student in these high schools will be denied a
college education due to the lack of funds for tuition, room and board, and fees.

For numerous years, you have been operating a scholarship fund at D through which you
have provided a scholarship to each and every eligible student at the three high schools
over the past few years. You will continue to maintain this fund and use it for scholarships
while also operating B which will provide you additional flexibility in awarding
scholarships.

Through B, you will cover the student's remaining cost of attendance after considering
the student's family's expected contribution and any other scholarships or grants that the
student is receiving (not including student loans). The amount awarded to a student
under B will not exceed x dollars per year. Further, you will promote the availability of B
through your publications and through providing materials to the participating schools.

In order to be considered for a scholarship under B, the applicant must be a graduate of
one of three high schools in the State of C and submit an application package consisting
of the application form, financial aid request, a transcript, and a signed pledge to keep
themselves free of any involvement with substance abuse or illegal drugs.

Applications will be reviewed by a scholarship selection committee consisting of your
Board of Director’s chairperson, your president and one other director as well one non-
director appointed by your Board who has experience in making scholarship awards.
The director and non-director committee members will serve one-year terms and may be
appointed to multiple successive terms.

The selection committee presided by your chairman will select worthy recipients based
primarily on their being accepted by and enrolling in a qualified educational institution.
Other criteria the selection committee may use include, but are not limited to, prior
academic performance, performance on aptitude tests, recommendations from
instructors or counselors, financial need, and other facts and circumstances such as the
conclusions which the selection committee might draw from a personal interview as to the
individual's motivation, character, ability, and potential.

Terms of the scholarship include the following:

• The scholarship recipient must begin their program of study in the fall following
their high school graduation;

• The scholarship recipient must maintain a full course of study;

• The scholarship recipient must complete their program of study in successive
semesters and in the designated time of the educational institution (i.e., four
semesters for community colleges and technical schools; eight semesters for four-
year colleges and universities; or within a timeline determined by the scholarship
committee for specialty programs).

Scholarships are granted for one year of tuition and fees. Recipients may apply to renew
their award for additional one-year terms for up to three additional years as long as they
remain enrolled in their school. Renewal awards will be redetermined each year in the
same manner as for the initial award.

Supervision of scholarships awarded by you will be made according to either of the
following methods, or a combination of both:

1) Scholarships paid directly by you to the educational institution and not to the student
will require that the educational institution agree to use the funds to defray the student's
expenses or to pay the funds to the student only if the student is enrolled at the
educational institution and their standing at such educational institution is consistent with
the purposes and conditions of the scholarship.

2) Scholarship paid by D will entail you paying a sum to the fund at D in order to fund
scholarships. Amounts paid D for this purpose are subject to review by D’s Scholarship
Committee, who make the final determination whether a student is eligible for the
scholarship and how much to award. The D Scholarship Committee, as provided by the
agreement establishing the fund, shall balance merit with financial need, with an
emphasis on financial need. When a student is deemed eligible for a scholarship, D then
pays the awarded amount directly to the student's chosen school and not to the student.

If a scholarship recipient does not complete the term for which the scholarship was
granted or withdraws from school, the scholarship recipient must notify you of the
reasons and their future intentions. You may request reimbursement for the monies
expended for an uncompleted term or during a period of withdrawal.

If you learn that scholarship funds have been used for an unintended purpose, you will
take all reasonable and appropriate steps to recover the grant funds or to ensure the
restoration of the diverted funds to the appropriate purposes of the scholarship. You will
withhold further payments to the recipient until the diverted funds have been recovered or
restored; you receive the grantee's assurances that future diversions will not occur; and
the grantee agrees to take extraordinary precautions to prevent future diversions from
occurring.

You will retain records pertaining to all scholarships made. Such records shall include all
information you secured to evaluate the qualification of potential recipients; identification
of recipients (including any relationship to you sufficient to make the recipient a
disqualified person); specification of the amount and purpose of each grant; and any
follow-up information that you obtain in compliance with the relevant Treasury
Regulations.

Finally, you plan to add additional high schools in C in the coming years, but reserve the
right to either broaden or narrow the pool of potential scholarship recipients by modifying
this list of high schools; provided however, the pool of potential scholarship recipients
may not be narrowed to a point whereby it is no longer sufficiently broad to serve a
charitable purpose.

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.

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