Regional scholarship, educational grant, and loan procedures approved

Plain-English summary

A private foundation sought approval for scholarships leading to undergraduate and graduate degrees, grants for nondegree education, and possible future low-interest educational loans. Applicants needed a strong connection to a specified region and were evaluated on academic performance, leadership potential, economic need, and commitment to that community. Grant funds would be paid directly to educational institutions, recipients would provide transcripts, and the foundation would stop or recover funding if award terms were violated. Disqualified persons and relatives of selection committee members were ineligible. The IRS approved the scholarship procedures under section 4945(g)(1) and the educational grant and loan procedures under section 4945(g)(3).

Ruling snapshot

• Question: Do the foundation’s proposed regional scholarship, educational grant, and low-interest loan procedures satisfy the advance-approval rules?
• Outcome: Approved.
• Key authorities: IRC §§ 74(b), 117, 170(b)(1)(A)(ii), 4945(g); Treas. Reg. § 53.4945-4(c)(1); Rev. Rul. 77-434.

Full text (IRS public release)

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

Release Number: 201621018
Release Date: 5/20/2016 Employer Identification Number:

Date: February 26, 2016
Contact person - ID number:

Name of Private Foundation

Address Contact telephone number:
Address
LEGEND UIL: 4945.04-04

C= Geographical Region
x= lower grant threshold amount
y= higher grant threshold amount

Dear :

You asked for advance approval of your educational grant and loan procedures under
Internal Revenue Code sections 4945(g)(1) and 4945(g)(3). This approval is required
because you are a private foundation that is exempt from federal income tax.

Our determination

We approved your procedures for awarding educational grants and loans. Based on the
information you submitted, and assuming you will conduct your program as proposed, we
determined your procedures for awarding scholarships meet the requirements of Code
section 4945(g)(1). We also determined your procedures for awarding educational grants
and loans meet the requirements of Code section 4945(g)(3). As a result, expenditures
you make under these procedures won't be taxable.

Also, awards meeting the requirements of Code section 4945(g)(1) which are 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 request indicates that you plan to award scholarships to individuals under section
4945(g)(1) to enable them to further their education at university by enrolling into
programs leading to bachelor's, master's, or doctoral degrees.

You will also provide educational grants under section 4945(g)(3) to those who wish to
improve their skills and abilities through non-degree courses, executive education, or
similar learning opportunities.

You do not currently award educational loans but may in future offer soft, low-interest
loans under 4945(g)(3) to students which they would not need to repay until they have
graduated and have been afforded an interest-free period of time to seek employment.

Awards may range from under $x (for students needing help with only a portion of their
tuition or for open courses and executive education) to, in rare instances, over $y
(representing full tuition at a top university for the length of years necessary to complete
the degree). For all awards, the amount is determined by a consideration of the type of
education program the applicant is applying to, the socioeconomic status of the applicant,
past academic performance, proven leadership ability, the applicant's commitment to the
C region and community, and your available resources.

The program will be publicized on your website, amongst networks of universities and
high schools, and occasionally via media. To be eligible, potential applicants must have
a strong tie or connection to the C region (e.g., born there, studied or lived there for a
long period of time, be of descent, etc.). Recipients will be chosen by a selection
committee based on past academic performance, leadership potential, and economic
need. Selection committee members (a total of three) will be chosen by your governing
body and are expected to be persons with strong ties to either the academic or business
world, such as teachers, academics, or business executives. The number of grants each
year will be decided by your board based on financial projections and availability of funds.

Disqualified persons are ineligible for any grants or loans. Relatives of selection
committee members are also not eligible.

For the students you select, you will pay grant funds directly to their academic institution
to be applied to their tuition and other expenses. In the case of large awards that cover
the entire year or more than one year, distributions to the institution would be made in
accordance with the school's regular tuition payment schedule.

Students must furnish grade transcripts to you upon request. You have represented that
you will arrange to receive and review such reports at least annually. If you become
aware that the terms of an award have been violated, you will communicate the violation
to the award recipient and try to have the violation corrected. If correction is not possible,
you will withhold all further distributions to the recipient and, in special cases, may require
the recipient to return some or all of the grant amount to you.

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 section 117(a) and is to be used for
  study at an educational organization described in section 170(b)(1)(A)(ii); or

• A prize or award subject to the provisions of section 74(b), if the recipient of
  the prize or award is selected from the general public; or

• To achieve a specific objective; produce a report or similar product; or
  improve or enhance a literary, artistic, musical, scientific, teaching, or other
  similar skill or talent of the recipient.

To receive approval of its educational grant procedures, Treasury Regulations section
53.4945-4(c)(1) requires that a private foundation show:

• The grant procedure includes an objective and nondiscriminatory selection
process.

• The grant procedure results in the recipients performing the activities the grants
were intended to finance.

• The foundation plans to obtain reports to determine whether the recipients have
performed the activities that the grants were intended to finance.

Long-term, low-interest loans that private foundations make for educational purposes can
be considered grants under Code section 4945(g)(3) and Revenue Ruling 77-434.

Other conditions that apply to this determination
• This determination covers only the grant and loan program described above. This
approval will apply to succeeding grant and loan 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 or loans 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 and loan 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,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements