IRS approves first-semester scholarships for high school graduates

Plain-English summary

A private foundation proposed scholarships for graduates of a particular high school who would attend college or trade school. Applicants needed at least a 3.0 grade point average and would be evaluated on financial need, academics, activities, family circumstances, career goals, test scores, and recommendations. The foundation would pay schools directly for first-semester tuition and would retain grant records and investigate any diversion of funds. The IRS approved the procedures under IRC § 4945(g)(1), so grants made under them would not be taxable expenditures. The letter also states that awards used for qualified tuition and related expenses would not be taxable to recipients, subject to IRC § 117(b).

Ruling snapshot

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

Full text (IRS public release)

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

Employer Identification Number:

Date: March 31, 2016
Contact person - ID number:

Number: 201626027 Contact telephone number:
Release Date: 6/24/2016

LEGEND UIL: 4945.04-04

B= High School
C= University

w= Number
x dollars = Amount

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 are operating a scholarship program to graduates of B for higher education. You
wish to honor achievements of qualified students and encourage their higher education,
and to put a meaningful dent in their debt incurred for higher education. The scholarship
will be awarded to reduce tuition in the first semester at a 2 year or 4 year college or
university of technical/vocational school in the United States whose tuition and mandatory

Letter 4792 (10-2012)
Catalog Number 58263T


fees charged to the student do not exceed those of the highest charged to in-state
residents at C.

B promotes your scholarship program via a bulletin board located in the main hallway of
its building. In addition, information about your scholarship program along with other
scholarships is posted on B’s website, and in its college and career database. Emails are
also sent to students and parents regarding scholarship opportunities. Furthermore, B
has made the application available electronically through a web page on its website.

In order to be eligible, applicants must:

• Be a senior at B and plan to attend college or trade school in the following fall
  semester which is described in Section 170(b)(1)(A)(ii).

• Have a cumulative GPA of 3.0 in grades 9-12 at the time of the application.

Students must also submit the completed application by the deadline to the guidance
office at B. As part of the application, applicants must:

• Provide an explanation on why they need financial assistance.

• Explain their career goals, intended major in college and/or academic fields of
  interest.

• Provide a statement explaining how they are a well-rounded person.

• Provide a list of extracurricular activities as well as any honors and awards for any
  accomplishments.

• Attach of copy their FAFSA (Free Application for Federal Student Aid) to their
  application.

• Arrange for two teachers to provide references to you.

• Arrange for the guidance office at B to provide you a copy of their transcript.

Your selection committee will consist of your founding trustee and family members who
are graduates of B; the founding trustee may also invite others at her discretion to
participate. Committee members of your selection committee must be interested and
committed to reviewing and rating/prioritizing applications.

Relatives of the trustees, of substantial contributors and of members of the selection
committee are not eligible for scholarships. There is no intent to favor scholarship
applicants that are friends or neighbors of disqualified persons, although it is possible that
members of the selection committee may be acquainted with a few of the applicants.

The committee will evaluate each applicant’s academic performance, financial need,
extracurricular activities, difficulties of family situation, career aspirations, SAT or ACT
scores, and recommendations of teachers, coaches and guidance counselors of B.

In addition, when ranking applicants, the following criteria will be used when discussing
and ranking applicants:

Letter 4792 (10-2012)
Catalog Number 58263T


• To what extent will the student’s higher education likely need to be financed with
  debt? (Your scholarships are aimed at persons who anticipate financing their
  education wholly or primarily with debt.)

• Is the student hard-working, as evidenced by the application, including
  references?

• Does the student have substantial extracurricular activities, whether in sports, an
  outside job, clubs or other activities?

The committee reserves the right to interview a small number of finalists before a final
decision is made. The scholarship recipients will be announced at B’s end-of-year awards
ceremony. In addition, the recipient must not have accepted another full or partial
scholarship grant at the time of the payment of the grant.

You intend to make payment directly to the schools as long as the grantee is enrolled, in
good standing and not under academic or other probation. The school must agree to use
the grant funds to defray the grantee’s tuition only. Prior to distribution of the grant, you
will require proof of enrollment. If a student drops out in the first semester, you will
require that you will have priority in any refund. You will obtain an agreement from the
student and his/her parents or guardian on this matter prior to paying the grant.

You will retain case histories and records pertaining to all scholarship grants.

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.

Letter 4792 (10-2012)
Catalog Number 58263T


• 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).

• 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