Military-family scholarship procedures receive approval

Plain-English summary

A private foundation proposed an annual scholarship for a financially needy high school senior from a low- to average-income enlisted military family. Applicants needed strong academics and character, and selection considered achievement, community interest, goals, an essay, an interview, and references. The foundation would pay the school directly, monitor enrollment and grades, keep grant records, and investigate misuse. The IRS approved the procedures under section 4945(g)(1), so compliant grants would not be taxable expenditures and qualified educational use could be excluded by recipients under section 117(b).

Ruling snapshot

• Question: Do the foundation's military-family scholarship procedures qualify for advance approval under section 4945(g)?
• Outcome: approved, subject to the stated procedures and continuing conditions
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 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: October 12, 2016
Contact person - ID number:

Number: 201701024 Contact telephone number:
Release Date: 1/6/2017

LEGEND UIL: 4945.04-04
X = School

Y = City, State

Z = Individual

b dollars = dollar 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 provide in Code section 117(b)).

Description of your request

Your mission is to provide financial incentives to high school graduates in financial need
from low- to average-income military enlisted families who are continuing their education
at colleges, universities, and/or vocational-technical colleges of their choice.

You offer an annual scholarship to a qualified student for their studies with the
understanding that the applicant will remain in school and in good academic standing
during the funding period.

The applicant must be a full-time senior high school student of X in Y and a son or
daughter of active and/or retired enlisted military personnel. The applicant must exhibit
proficiency in overall academics, with a minimum 3.5 GPA. The applicant shall also

Letter 4792 (10-2012)
Catalog Number 58263T

possess excellent character, including work ethic, honesty, and integrity. Applicants must
have the endorsement of their guidance counselor on their application attesting they are
qualified for the scholarship program.

Your selection committee members shall initially consist of descendants of Z and their
spouses. Relatives of your officers, directors or selection committee members will not be
eligible to receive a grant.

Each year, you will award a scholarship to one applicant. The amount of the full
scholarship will be a maximum of b dollars and may be used exclusively for tuition at a
post-secondary educational institutions as described in Section 170(b)(1)(A)(ii) of the
Code, provided the recipient continues to maintain their eligibility and enrollment.

Scholarship selection is based on academic achievement, character, demonstrated
interest in the community, statement of goals, an essay, personal interview and letters of
reference.

Once the scholarship is awarded, the recipient will submit to you his or her course
schedule with the cost of the programs. You will submit payment directly to the institution
and not to the student. It will be the responsibility of the student to submit all college
information and any other requested information necessary to verify continued
enrollment.

The college shall send an official transcript of grades and courses directly to you, each
semester, before any amounts of scholarship monies are paid.

You will maintain case history records of grants, including the recipient's name, address,
amount and purpose of the grant, manner of selection, a copy of the application and
application materials, transcripts, and confirmation that no relationship exists with your
officers, directors, selection committee members or donors.

Should you learn of a misuse of fund's by the grant recipient, you will investigate the
alleged misuse and confirm whether or not such misuse occurred. You will withhold the
delivery of any additional funding pending the outcome of any investigation. If the alleged
misuse of funds is confirmed, you will seek to recover the misused funds from the grant
recipient and terminate the grant recipient’s award.

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