IRS approves scholarships for students with disabilities

Plain-English summary

A private operating foundation proposed scholarships to help students with disabilities attend an eligible educational institution. Financial need, recommendations, enrollment, tuition costs, other aid, academic progress, and information about developmental disabilities would inform eligibility. Trustees would select recipients, and disqualified persons and specified insiders and family members could not receive awards. Scholarship payments would go directly to the school, which would supervise their use and return unused funds. The IRS approved the procedures under IRC § 4945(g)(1), so grants made under them would not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation's procedures for awarding scholarships to students with disabilities satisfy the advance-approval requirements of IRC § 4945(g)?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), and 4946

Full text (IRS public release)

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

Date: March 31, 2016

Employer Identification Number:

Number: 201626026
Release Date: 6/24/2016 Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

X= Scholarship Program
Y= School Name

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
Your letter indicates that you will operate an educational scholarship program called X.

The purpose of X is to provide scholarships to aid students with disabilities in attending Y,
an educational institutional described in section 170(b)(1)(A)(ii). You will coordinate with
school administrators to solicit current and prospective students who may be eligible for

Letter 4792 (10-2012)
Catalog Number 58263T


the program as well as develop and incorporate formal announcement materials, as
necessary, while continuing to work directly with school administrators to engage in word
of mouth solicitation. You may expand X to include other qualified educational
institutions. You will base the amount of the individual scholarships on the recipient's
need and the number of scholarships will be variable. This will annually be determined at
your discretion and the amount of funds available for distribution which may be
permissibly distributed while maintaining your status as a private operating foundation.

In determining eligibility, you will evaluate (a) documents relevant to determining financial
need, (b) letters of recommendation from schools, teachers, counselors and
parents/guardians, (c) proof of enrollment in the school, college, university, etc., (d)
copies of tuition bills, (c) copies or other proof of any other grants or loans awarded, (f)
copies of grade transcripts or evaluations of the individual's academic progress and (g)
letters from the individual explaining in his/her words why he/she is deserving of the
scholarship, if available. You will also consider information relevant to a student's
developmental disabilities when determining eligibility of developmentally disabled
students.

The following individuals shall not be eligible to apply for or receive a scholarship from
you: (a) any employee of yours, as well as any family member of such an individual; (b)
any executive, officer, or director of yours , as well as any family member of such an
individual; and (c) any otherwise “disqualified person” with respect to you as defined by
Section 4946 of the Code, as well as any family member of such an individual.

The scholarship recipients will be selected by a selection committee consisting of your
trustees. Your trustees may select additional committee members who they deem as
qualified based on their experience with or are interested in the education field or that
they are a manager, director, officer or serve in a similar capacity for other organizations
in which they have to make the similar decisions.

All scholarships awarded by you are expected to be paid to the accredited educational
institution in which the recipient is enrolled and only in the event that the institution
agrees to supervise the use of the scholarship. The conditions placed upon the
scholarships shall be that: the recipient must be enrolled in an education institution, and
the scholarship must be used to cover the cost of the student’s tuition, fees, books, room
and board, research, fees and other expenses associated with the completion of the
recipient’s degree. Any unused funds shall be transferred by the educational institution
back to you. You will require an annual report from each educational institution for the
purpose of confirming the recipient's enrollment and academic performance.

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

Letter 4792 (10-2012)
Catalog Number 58263T


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:

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).

Letter 4792 (10-2012)
Catalog Number 58263T

• 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