IRS approves multiple scholarship programs

Plain-English summary

A private foundation proposed several classes of one-time scholarships for graduating high school seniors and one university student. The programs used varied criteria, including academic standing, financial need, field of study, vocational coursework, community activity, ethnicity, attendance at specified schools, and family involvement in a specified association. Donors appointed external or trustee selection committees for two classes, while the foundation's trustees selected recipients for the association-related class. Committee members had to recuse themselves from decisions that could benefit them, and relatives and descendants of donors were excluded from the first two classes. Educational institutions would receive the funds directly and provide progress reports, diversion notices, and refunds of unused revoked grants. The IRS approved the procedures as objective and nondiscriminatory under IRC § 4945(g)(1).

Ruling snapshot

• Question: Do the foundation's procedures for its several one-time scholarship programs satisfy the advance-approval requirements?
• Outcome: Approved
• Key authorities: IRC §§ 117(a)-(b), 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

Date: October 13, 2020
Employer Identification Number:

Number: 202101010
Release Date: 1/8/2021 Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

B = Scholarship
C = Scholarship
D = Scholarship

E = State

F = Ethnicity
G = Ethnicity
H = School

J = School

K = University

L = Association

M = Association

r dollars = Amount
s dollars = Amount
t dollars = Amount
u dollars = Amount
v dollars = Amount
w dollars= Amount
x dollars = Amount
y dollars = Amount
z dollars = Amount

Dear

You asked for advance approval of your educational grant procedures under Internal
Revenue Code Section 4945(g)(1). 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.

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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 that you will operate an educational grant program. The purpose of
your grants is to further your exempt purpose of promoting education. You will do this by
awarding grants to graduating high school seniors who intend on furthering their
education at qualified educational institutions, including colleges, universities, and
vocational schools.

To advertise your grants, you represent that you rely on your website and local high
school guidance counselor offices. At a minimum, your grants require an application
form, two letters of recommendation, and a personal photograph that must be submitted
by an annual deadline. Additional qualifying criteria are required for some of your grants.
Candidates may apply for more than one grant by following the submission guidelines in
the application form. Grants are not renewable.

You represent that your grant program consists of three classes/categories, B, C, and D.

B and C were created pursuant to agreements between you and your donors to award
grants to graduating high school seniors in E who are furthering their education. Twelve
different grants are included in these two classes.

One grant of r dollars is awarded annually to a graduating high school senior attending a
local public school. The recipient must be pursuing a post-secondary education and have
at least a 3.50 grade point average. Preference will be given to applicants who can
substantiate an F ethnicity.

Three grants of t dollars are awarded annually to graduating high school seniors
attending local public schools. Recipients must be pursuing a post-secondary education
in the field of education and rank within the top 25 percent of their graduating senior
class.

One grant of t dollars is awarded annually to a graduating high school senior attending a
specific local area public high school. The recipient must be pursuing a post-secondary
education at a four-year college or university; rank in the top 25 percent of his or her
graduating class; and demonstrate participation in extracurricular and community
activities. Preference will be given to applicants with a G ethnicity.

One grant of u dollars is awarded to a graduating high school senior attending a local
public school. The recipient must have attended H for a period of three or more years.
The recipient must also be pursuing a post-secondary education and rank in the top one-
third of his or her graduating senior class.

Letter 4792 (10-2012)
Catalog Number 58263T

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One grant of u dollars is awarded to a high school senior attending a local public school.
The recipient must have attended J. The recipient must also rank in the top 50 percent of
his or her graduating senior class, as well as demonstrate financial need and outstanding
personal character to the satisfaction of the selection committee.

One grant of t dollars is awarded annually to a graduating high school senior attending a
local public high school. The recipient must be pursuing a degree in the field of education
and rank in the top 25 percent of his or her graduating senior class, while also
demonstrating outstanding personal character to the satisfaction of the selection
committee.

Three grants of t dollars are awarded annually to graduating high school seniors
attending local public schools. Recipients must demonstrate work histories with an intent
of earning and saving money to defray the costs of furthering their education after high
school. In addition, recipients must rank in the top one-third of their graduating senior
classes, demonstrate good citizenship behaviors, and demonstrate participation in
extracurricular activities.

One grant of u dollars is awarded annually to a graduating high school senior attending a
local public high school who plans to major and/or minor in a foreign language and
demonstrates to the satisfaction of the selection committee why he or she should be
considered for the grant.

One grant of u dollars is awarded annually to a graduating high school senior attending a
local public high school. The recipient must have attended a specific local elementary
school. The recipient must demonstrate achievements in academic, extracurricular, and
community pursuits to the satisfaction of the selection committee. In addition, the
recipient should demonstrate leadership skills and explain how his or her pursuit of higher
education will make a valuable contribution to the improvement of society.

Two grants of u dollars are awarded annually to graduating high school seniors that
completed qualifying vocational coursework during their junior and/or senior years of high
school. Recipients must demonstrate how their vocational education, academic
achievements, and school activities have had a positive impact on their community.

One grant of u dollars is awarded annually to a graduating high school senior that
completed qualifying vocational coursework during his or her junior and/or senior years of
high school. The recipient must demonstrate how his or her vocational education,
academic achievements, and school activities will positively impact society through
vocational education.

One grant of z dollars is awarded annually to a student enrolled at K to allow him or her
to continue his or her education at the university. There is no restriction as the area of
study. The student must demonstrate to the satisfaction of the selecting committee that
he or she has paid part of his or her tuition through paid employment, in addition to
demonstrating academic achievement and successive leadership

Letter 4792 (10-2012)
Catalog Number 58263T

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Within these two classes, B and C, you represent that eligible candidates must meet one
or more of the following criteria: graduating from a specific public high school; maintaining
a minimum grade point average; inclusion in a specific minority group or religion;
participating in certain academic and/or extracurricular activities; and/or pursuing a career
in a specific field of study. Relatives and descendants of donors are precluded from the
pool of eligible candidates.

You represent that your donors appoint your grant selection committee. For B, donors
appoint an external committee, typically consisting of the administration and faculty from
local public schools. For C, donors appoint your board of trustees. Any member of the
selection committee will excuse himself or herself from the selection process if it is
discovered that he or she would derive a direct or indirect benefit from the selection of a
candidate.

For both classes, you represent that selection committees collect and review applications
before choosing recipients based on the above-stated selection criteria. You state that
this selection criteria furthers your exempt purposes of promoting the cause of education
while also providing an objective and nondiscriminatory basis for awarding grants.

Your third grant class, D, was created pursuant to an agreement between you and former
members of the L to award grants to the children and grandchildren of L members, L
retired members, or M members who are also former L members.

The level of involvement of applicants’ parents and/or grandparents in the L will be used
as a factor in selecting grant recipients, along with the student’s merits, such as Grade
Point Average (GPA), extracurricular activities, volunteer work, community involvement,
and letters of recommendation. The minimum level of involvement of the
parent/grandparent must be three years and may be demonstrated through participation
in the L’s activities and committees. You state that this selection criteria furthers your
exempt purposes of promoting the cause of education by providing worthy students with
scholarships.

The following grants will be provided to graduating high school seniors pursuing a post-
secondary education in any field that submit the required application and accompanying
materials and demonstrate to the satisfaction of the selection committee that their
personal character and academic accomplishments will reflect positively upon the L:

• 1 grant of v dollars
• 12 grants of w dollars
• 10 grants of x dollars
• 7 grants of y dollars
• 1 grant of r dollars

Two grants of u dollars are awarded to graduating high school seniors pursuing post-
secondary degrees in the field of education. Two additional grants of u dollars are
awarded to graduating high school seniors pursuing post-secondary educations in the

Letter 4792 (10-2012)
Catalog Number 58263T

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field of elementary education. Recipients must demonstrate to the satisfaction of the
selection committee their personal behavior and character will reflect positively on the
teaching staffs of their high schools as well as your organization.

You represent that your board of trustees serve as the selection committee. Any
committee member will excuse himself or herself from the selection process if it is
discovered that he or she would derive a direct or indirect benefit from the selection of
any candidate for any of your grants.

For disbursement of grants, you represent that educational institutions directly receive the
funds if they agree to (1) provide an annual report on the academic progress of each
recipient; (2) notify you if any recipient fails to meet required academic standards or
misuses funds; and (3) refund any unused portion of a revoked grant. Institutions that do
not agree to these terms will not receive any funds. You will inform grant recipients of the
institutions’ refusal of your terms.

To ensure grants are used for their intended purposes, you represent that you will
conduct reviews of annual reports provided by educational institutions. Diversions of
grants from their intended purposes will be investigated and any future disbursements will
cease until the institution and/or the recipient provide reasonable assurance that
preventative measures have been implemented to mitigate any future diversions.

To maintain records, you represent that you keep the following on file: the names and
addresses of grant recipients; how each recipient was selected; the purposes for and
amounts of each awarded grant; and the relationship (if any) between grant recipients
and your officers, trustees, and/or donors. You represent you will also maintain records of
the annual reports provided to you by educational institutions, as well as records of any
reports and/or investigations of diversions of grants.

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

Letter 4792 (10-2012)
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• This determination covers only 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 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 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 must
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 any 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