IRS approves a foundation's college scholarship procedures

Plain-English summary

A private foundation proposed a scholarship program for high school seniors and incoming college students attending a U.S. community college, trade or vocational school, or four-year institution. Applicants had to maintain at least a 3.0 grade-point average, participate in community service, show leadership and work ethic, and provide references, with special consideration for financial need. A family-member scholarship committee would select recipients subject to board approval, while committee and board members and their immediate families were ineligible. Awards would be paid directly to a school's financial aid office and could be renewed if the recipient remained enrolled, maintained the required grades, and submitted a personal statement. The IRS approved the procedures under section 4945(g)(1), so awards under the program would not be taxable expenditures and could be tax-free to recipients when used for qualified tuition and related expenses within section 117(b).

Ruling snapshot

• Question: Did the foundation's procedures for selecting, paying, and supervising scholarship recipients qualify for advance approval?
• Outcome: approved (scholarships made under the procedures would not be taxable expenditures)
• Key authorities: IRC §§ 117, 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: 202028002
Release Date: 7/10/2020
Employer Identification Number:

Date: April 14, 2020
Contact person - ID number:

Contact telephone number:

LEGEND

UIL: 4945.04-04

B = Scholarship
C = Name

d dollars = Amount

Dear Applicant:

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 called B. Your purpose is to
empower students in pursuing a higher education. You believe that one of the most
worthy and impactful investments you can make is in a young person’s education. It’s
your intent to identify and reward a select group of rising college students who shall be
distinguished as C Scholars.

The purpose of B is to help high school seniors and college students defray the costs of
post-secondary education. To expand the reach of scholarship candidates, post-

Letter 4792 (10-2012)
Catalog Number 58263T

secondary education includes two-year community college, trade/vocational school, or
four-year college university located in the United States.

Your program is publicized through: (1) your website; (2) social media accounts; (3) email
newsletters sent to participating schools and organizations, (4) radio broadcasts on local
stations; and (5) flyers that participating schools can download and post.

In order to apply for B, the candidate must:

• Be in their current year high school graduating class or incoming college freshman

• Plan to enroll or demonstrate proof of enrollment at either a (1) two-year
community college, trade or vocational school, or a (2) four-year college or
university in the United States

• Prioritize academic excellence, maintaining at minimum a grade point average of
3.0 or better on a 4.0 scale

• Demonstrate active participation in community service

• Be motivated leaders with a strong work ethic and be involved in extra-curricular
activities, and

• Provide two letters of reference, including one from a volunteer community service
experience.

Recipients are selected based on a holistic assessment of their community service,
academic excellence, and obstacles faced and overcome. Special consideration will be
given to students with evidence of financial need.

Your Board of Directors will determine the number of grants made annually. The goal is
to provide at least one d dollar scholarship per year.

In order to qualify for a renewal of a grant, a scholarship recipient must provide:

• Evidence of active enrollment in an institution of higher education

• A certified transcript maintaining at minimum a grade point average of 3.0 or better
on a 4.0 scale.

• A one-page personal statement explaining how the most recent academic year
has impacted their goals. The personal statement must include the recipient’s (1)
name; (2) high school and year of graduation; (3) university, college, trade or
vocational school; and (4) the year the student became a C Scholar.

Your Scholarship Committee will supervise the scholarship program. Your Scholarship
Committee consists of family members who may be replaced on an annual basis, or as
needed, based on their availability. Should a committee member require replacement,
you would search for another individual who shares values to improve a student’s higher

education accessibility.

To determine financial need, applicants will submit to you a selected portion of their
student aid reports or the expected family contribution page of FAFSA. To ensure the

Letter 4792 (10-2012)
Catalog Number 58263T

intended use for the scholarship award, students must provide evidence of acceptance or
admittance to an institution of higher education.

To reduce scholarship fraud, scholarship awards will be sent directly to the student’s
higher education’s financial aid office after proof of enrollment is provided to you. Unused
awards will be returned to you.

The Scholarship Committee will select the scholarship winner subject to the approval of
your Board of Directors. No member of your Scholarship Committee, nor their immediate
family, shall be eligible for scholarship assistance during his or her tenure on the
Scholarship Committee. Further, no member of your Board of Directors, nor his or her
immediate family, shall be eligible for scholarship assistance during his or her tenure on
your Board of Directors.

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 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.

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• 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

Letter 4792 (10-2012)
Catalog Number 58263T