Foundation scholarship procedures approved

Plain-English summary

A private foundation requested advance approval for scholarships supporting needy undergraduate and graduate students in a metropolitan area. Its board would select recipients based on financial need, academic performance, motivation, ability, character, achievement, and potential, without discrimination or awards to disqualified persons. Awards generally would be paid directly to qualifying educational institutions, and recipients would accept reporting and use restrictions. The foundation would investigate missing documentation or misuse, recover improperly spent funds when appropriate, and maintain detailed records. The IRS approved the procedures under IRC § 4945(g)(1) and explained that amounts used for qualified tuition and related expenses would not be taxable to recipients, subject to IRC § 117(b).

Ruling snapshot

• Question: Did the foundation's scholarship procedures satisfy IRC § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), 4946(a)

Full text (IRS public release)

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

Number: 201550047 Employer Identification Number:

Release Date: 12/11/2015
Contact person - ID number:

Contact telephone number:
Date: September 14, 2015

LEGEND UIL: 4945.04-04
b= Number
X= City

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

You will operate a scholarship program to provide financial support to needy students in
the X metropolitan area who demonstrate the potential to excel in postsecondary
(undergraduate or graduate) educational opportunities.

You currently plan to award up to b grants annually at the discretion of your Board of
Directors. The amount of each award will depend upon the grantee’s financial need, as
described by the grantee in his or her application materials. You will accept
recommendations and applications on a rolling basis. The courses of study for
scholarship grant recipients will not be limited.

Letter 4792 (10-2012)
Catalog Number 58263T

2

Scholarship grants may be used for tuition at four-year postsecondary or graduate
educational institutions that normally maintain a regular faculty and curriculum, as
described in Section 170(b)(1)(A)(ii), and for fees, books, supplies, and equipment
required for courses at such institutions. Scholarships may also be used for other
expenses related to matriculation at a qualifying postsecondary or graduate institution,
such as housing and other living expenses.

The pool of grantees eligible for scholarship grants consists of needy students who are
residents in the X metropolitan area as of the date of application, and who are enrolled,
or intend to enroll, in an institution of higher education described in Section
170(b)(1)(A)(ii) of the Code.

Potential grantees must submit applications including a written statement of financial
need, a short biographical record, a narrative of the course of study or goals describing
what the applicant expects the grant to help him/her achieve, and information to ensure
that the potential grantee meets the eligibility requirements and is not a disqualified
person. Potential grantees must also submit letters of support and at least two additional
references.

Grantees will be selected by your Board of Directors from among those applications on
the basis of selection criteria, including financial need, prior performance in academic
coursework, and the evaluation by your Board of Directors of the applicant’s motivation,
ability, character, achievement, and potential as demonstrated in a written statement or
personal interview provided by each potential grantee.

Your Board of Directors will select grant recipients from among eligible recipients without
discriminating on the basis of race, gender, sexual orientation, ethnicity, nationality, or
religion. Disqualified persons within the meaning of Internal Revenue Code Section
4946(a) (including your directors and officers and their family members) are not eligible to
receive any awards.

You will provide each recipient with an award letter notifying him or her of the grant. The
letter will specify that all amounts must be used in accordance with the grant
requirements for tuition at four-year post-secondary educational institutions that normally
maintain a regular faculty and curriculum as well as for fees, books, supplies, and
equipment required for courses at such institutions or other expenses related to
matriculation at such educational institutions, such as housing and other living expenses.
The award letter will describe the reporting requirements and will specify the date by
which the recipient must comply with the reporting requirements. You will require the
scholarship recipient to sign and return a copy of the award letter indicating his/her
acceptance of the scholarship and its terms before you will disburse any scholarship
funds.

You will pay awards directly to the qualified educational institution. In the event that an
educational institution returns the residual balance of a scholarship award to a grantee,
the grantee must certify that the money will be used for tuition, fees, books, supplies,

Letter 4792 (10-2012)
Catalog Number 58263T

3

and/or equipment required for his or her courses of instruction at a qualified educational
institution. You will investigate if any grant recipient fails to provide the documentation
required under the grant procedures within a reasonable amount of time, and withhold
further grant funds until such documentation has been submitted consistent with the duty
of a private foundation to investigate jeopardized grants under the Treasury Regulations.
If you determine that any grants have been used for improper purposes, you shall take all
reasonable and appropriate steps, up to and including legal action unless such action in
all probability would not result in satisfaction of execution of a judgment, to recover
improperly expended funds and to ensure that any funds held by the recipient will be
used exclusively for the purposes of the grant award.

You will keep the following records with respect to each grantee:

1. All information that you secure to evaluate the qualification of potential grantees;
2. The identity of each grantee, including any information on relationships that would
   cause the recipient to be a disqualified person;
3. The amount and purposes of each grant;
4. A copy of the award letter notifying the recipient of the grant;
5. Any follow-up information obtained as described above; and
6. Any measures taken to investigate the misuse of grant funds or to enforce grant
   terms.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

4

• 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.

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,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T