Broad educational scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed scholarships for primary and secondary students, college and graduate students, and people pursuing vocational, artistic, or other accredited training. Trustees would choose grant-specific criteria from an approved range that included academics, aptitude, recommendations, financial need, motivation, residence, school attendance, course of study, and special talent. Grants generally would be paid directly to qualifying educational institutions and would not renew automatically. If payment went elsewhere, recipients had to provide school-verified annual and final reports, and the foundation would investigate and recover diverted funds. The IRS approved the procedures under section 4945(g)(1), so awards made as proposed would not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation's flexible educational scholarship procedures qualify for advance approval under IRC § 4945(g)(1)?
• 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

Release Number: 201710037
Release Date: 3/10/2017 Employer Identification Number:

Date: DECEMBER 13, 2016
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
X= Number of scholarships
Y= Amount of scholarship

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
You will provide Scholarship Grants to high school, college, and graduate school

students to enable the recipients to pursue an undergraduate or graduate education at
the college or graduate school of their choice. Additionally, you may provide Scholarship
Grants to individuals to enable the recipients to take a course of study leading to a
certificate or achieve a skill level, such as at a vocational or art school, or provide grants
to primary and secondary school students to allow them to attend certain educational
programs.

Letter 4792 (10-2012)
Catalog Number 58263T

Initially, you will offer x scholarships per year to high school graduates in the amount of y.
Moving forward, the exact number of grants to be awarded annually and the exact
amount of each of those grants will be determined by your Trustees.

The criteria for Scholarship Grants may include, but are not limited to, the following: prior
academic performance, performance of the applicant on tests designed to measure
ability and aptitude for educational work, recommendations from instructors of the
applicant and any others who have knowledge of the applicant’s capabilities, additional
biographical information regarding an applicant's academic and other relevant
experiences, financial need and information to assist with the assessment of the
applicant’s motivation, character, ability, or potential. Criteria may also include the
applicant’s place of residence, past or future attendance at a particular school, past or
proposed course of study or evidence of the applicant’s artistic, scientific or other special
talent.

Depending on the scholarship to be awarded, the recipients of Scholarship Grants must
be (1) primary or secondary school students; (2) undergraduate or graduate students at a
college or university who are pursuing studies or conducting research to meet the
requirements for an academic or professional degree; or (3) students at an institution that
provides an educational program or offers a training program to prepare students for
gainful employment in a recognized occupation and is authorized under federal or state
law to provide such a program and is accredited by a recognized accreditation agency.

When you decide to make a Scholarship Grant, the Trustees will determine the specific
criteria for such grant (selecting only from the permissible range of criteria options set
forth above) that will be used to select Scholarship Grant recipients, with the
understanding that the specific criteria must be appropriate to accomplishing the
underlying purpose of the grant. All Scholarship Grants must be for Qualified Expenses at
an Educational Institution. Grants are not automatically renewable.

In order to be eligible for a Scholarship Grant, an applicant must meet the following
standards:

1. The applicant must submit a confidential application on a form to be approved by
   you or by a representative or scholarship committee of a qualified Educational
   Institution.

2. The applicant must meet the specific criteria to be established by the Trustees or
   by a representative or scholarship committee of a qualified Educational Institution.

3. The applicant must be enrolled in or about to enroll in an Educational Institution.

You will publicize the availability of scholarship grants through school and college
counseling offices and similar student scholarship clearinghouses. You may also contact
high school, college and graduate school administrators to request that these

Letter 4792 (10-2012)
Catalog Number 58263T

3

administrators nominate potential candidates or encourage potential awardees to submit
applications for such grants.

When possible, a Scholarship Grant will be paid directly to the Educational Institution for
the benefit of the grant recipient. Each Educational Institution must be described in IRC
Section 170(b)(1)(A)(ii) and must agree in writing to use the grant funds to defray the
scholarship recipient's expenses or to pay the funds or any portion thereof to the recipient
only if the recipient is enrolled at such Educational Institution and his or her standing at
the Educational Institution is consistent with the conditions of the grant, if any.

If for any reason, a Scholarship Grant is paid to a person or entity other than the
Educational Institution attended by the scholarship recipient, the scholarship recipient
must provide a written report on the use of such a Scholarship Grant at least once each
year and at the end of the grant period. This report must include a summary of the use of
the funds awarded, and the grantee’s courses taken (if any) and grades received (if any)
in each academic period. This report must be verified by the Educational Institution.

If you learn that all or any part of a Scholarship Grant is not being used to further the
purposes of the grant, you will take all reasonable and appropriate steps to recover the
grant funds and/or ensure restoration of the diverted funds to the purposes of the grant. If
such a diversion occurs and the grantee has not previously diverted grant funds to any
use that does not further the purposes of the grant, you will withhold any further
payments to the grantee until it has received acceptable assurances that future
diversions will not occur and will require the grantee to take extraordinary precautions to
prevent future diversions from occurring.

Where a grantee has previously received funds and it is determined that any part of a
grant has been used for improper purposes, you will take all reasonable and appropriate
steps to recover the grant funds and/or ensure the restoration of the diverted funds to the
purposes of the grant. In such case, you will withhold further payments until: (1) the
diverted funds are in fact recovered or restored; (2) you have received assurances that
future diversions will not occur, and (3) it has been required that the grantee has taken
extraordinary precautions to prevent future diversions from occurring.

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

4

• 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.

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