Three scholarship programs receive advance approval

Plain-English summary

A private foundation requested advance approval for the procedures used by three scholarship programs. The programs generally support qualifying students, many of whom are pursuing teaching degrees, and use stated academic, membership, service, and career criteria. Selection committees score applicants, and the foundation pays awards directly to colleges or universities for tuition. The IRS approved the procedures under section 4945(g)(1), so grants made under them will not be taxable expenditures if the foundation operates the programs as proposed. The approval requires continued supervision, recordkeeping, recovery of diverted funds, and exclusion of foundation insiders, selection committee members, and their relatives.

Ruling snapshot

• Question: Do the foundation's procedures for three scholarship programs satisfy the advance-approval requirements of section 4945(g)(1)?
• Outcome: Yes, provided the programs operate as proposed and comply with the stated conditions.
• Key authorities: IRC §§ 117, 170, and 4945(g)

Full text (IRS public release)

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

Number: 201608020                                Employer Identification Number:

Release Date: 2/19/2016
                                                  Contact person - ID number:

                                                  Contact telephone number:
Date: November 24, 2015

LEGEND                                            UIL: 4945.04-04

B= Scholarship Program 1
C= Scholarship Program 2
D= Scholarship Program 3

F = Location
G = County
H = Region

J= Organization

K = Organization

L = Organization

M = Region

w dollars = Amount
x dollars = Amount
y dollars = Amount
z dollars = Amount

Dear [illegible]:

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)).

Letter 4792 (10-2012)
Catalog Number 58263T


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Description of your request

Your letter indicates you will operate scholarship programs called B, C and D. The overall
purpose of the scholarships is to award students who display a high level of academic
proficiency monetary scholarships (typically w dollars – x dollars per scholarship) to cover
a small part of their tuition. The bulk of the scholarship award money granted by you is
provided to students who are pursuing a teaching degree in an accredited teacher
preparation program in the F, in order to encourage outstanding students to become
educators.

The scholarship programs are publicized in various ways including the following:

• Electronic links to the applications on the J website

• Email notifications to the Presidents of J’s affiliated local associations located
  throughout the F

• Notification of the scholarship programs through the use of social media such as
  Facebook and twitter accounts

• Distribution of applications to high school guidance counselors

• Distribution of applications to Student J Chapter Advisers at colleges and
  universities throughout the F

The B provides for one or more scholarships in the F area. The specific criteria used to
determine eligibility for B are as follows:

• Completion of scholarship application form in its entirety

• Enrollment in an approved undergraduate program of teacher education in an
  accredited institution of higher education in the F

• Demonstration of a high degree of academic proficiency

• Active membership in Student J (for current college students) or K or L (for high
  school seniors), if such chapter is available at their school

• Demonstration of desire to become an educator to improve the quality of
  education in F

Candidates for the B must be members in good standing of their high school community
L, where available, and intend to enroll in an approved undergraduate program of teacher
education at an accredited institution of higher education in the F. Candidates must
submit official grades and/or transcripts with their application forms to show a high
degree of academic proficiency. If selected, candidates must submit a formal letter of
acceptance from an approved undergraduate teacher education program.

The C will provide two y dollars scholarships for individuals in the G area. The specific
criteria used to determine eligibility for the C are as follows:

• Completion of scholarship application form in its entirety including an essay

• Enrollment in an approved undergraduate program in an accredited institution of
  higher education in the F

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• Demonstration of a high degree of academic proficiency

• Son or daughter of a member in good standing of the J who is working for a school
  employer located in G, F

When selecting recipients of the C, Scholarship Selection Committee members shall
each individually score the scholarship applicants based on overall GPA with weight of
classes taken considered in the ranking process. Following the completion of their
preliminary rankings of the scholarship applicants, the committee members shall discuss
the applications and rankings and may alter any of their rankings. Committee members
then submit their final ranking of the scholarship applications. The top scholarship
applicant(s) will be selected based upon the highest composite scores of the applications.
Higher scores may determine larger scholarship amounts. A tie ranking may be broken
through evaluation by the Selection Committee following interviews (either phone or in-
person) with the affected applicants. Copies of all applications and rankings shall be
maintained by the J for one year following the grant of the scholarship. Two applicants
who meet all application criteria may be granted a scholarship per year. The name of the
applicant(s) recommended by the Selection Committee shall be sent to J for final
approval.

The D is for high school graduates who plan to attend a college or university in the H
area and will be for z dollars. The specific criteria used to determine eligibility for the D
are as follows:

• Completion of scholarship application form in its entirety

• Enrollment in an approved undergraduate program of teacher education in an
  accredited institution of higher education in the F

• Demonstration of a high degree of academic proficiency

• Son or daughter of a member in good standing of the J who is working for a school
  employer located in G, F.

The following criteria may also be used to select scholarship recipients depending on the
particular scholarship program:

• Participation in school related organizations, activities, or clubs

• Participation in community related organizations, activities, or clubs

• Elected position(s) held in school related or community organizations, activities or
  clubs

• Overall grade point average

• Education related coursework taken/grade achieved

• Reasons for becoming an educator/vision for improving education

• Plans for future participation in J or Student J

The make-up of the Scholarship Selection Committee is defined in the trust document.
Standing committee members are defined by position (within J staff or governance). The

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individuals holding those defined positions maintain the flexibility to assign other
members to the Committee as needed. The current make-up of each Scholarship
Selection Committee is as follows:

B Selection Committee

• J Staff Consultant to Student Associations

• Student J President

• Such other committee members as the J Staff Consultant to Student Associations
  and Student J President may designate

C Selection Committee

• J Midwestern Region President

• J Midwestern Region Field Director

• Such other committee members as the Midwestern Region President and Region
  Field Director may designate (none currently)

D Selection Committee

• J Western Region President

• J Western Region Field Director

• Such other committee members as the Western Region President and Region
  Field Director may designate

The number of scholarships is determined in conjunction with a review of your income
from the previous year, along with a review of the number of grants given out in the
previous year. Each scholarship program is required to award at least one scholarship of
z dollars each year per the trust document. You anticipate awarding approximately 12
scholarships each fiscal year.

The maximum amount of total scholarships awarded annually for each program is
determined by the trustees in advance of the scholarship selection process. The amount
is determined in conjunction with a review of the scholarship trust’s income from the
previous year, along with a review of the total amount of scholarships awarded in the
previous year. The Scholarship Selection Committee sets the amount of each individual
grant within the approved total maximum amount determined by the trustees. The
Selection Committee utilizes a scoring rubric to evaluate each applicant based on the
previously mentioned criteria. Applicants with higher scores may be awarded higher
scholarship amounts. Currently the individual scholarship awards range in amount from w
dollars to x dollars.

Recipients must attend a four-year college or university and provide an acceptance letter
from the college or university as well as provide their student ID number. All scholarship
awards are sent directly to the college or university financial aid office for application to
the students tuition account. Scholarship awards are a one-time grant. Accompanying the

Letter 4792 (10-2012)
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check will be a cover letter explaining that the scholarship is to be applied to tuition and if
the student is no longer enrolled for any reason, the check must be returned to the trust.
If any diversion of scholarship awards from their intended purposes came to the trust’s
attention, reasonable and appropriate steps would be taken to recover the funds.
Applicants may re-apply for scholarships in subsequent years provided they continue to
meet the criteria described above.

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 a grantee are used for their intended purposes, and (4) 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 diversion from
occurring.

You represent that you will maintain the following: (1) all records relating to individual
grants including information obtained to evaluate grantees, (2) identify a grantee is a
disqualified person, (3) establish the amount and purpose of each grant, and (4) establish
that you undertook the supervision and investigation of 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.

• 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:

Letter 4792 (10-2012)
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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,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T