Local high school graduate scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed six annual scholarships for graduates of a specified high school who had at least a 2.5 grade point average and wanted to attend college or university. Applicants would be evaluated on academics, school and community activities, financial need, references, and an essay, without discrimination on listed protected grounds. Employees, managers, directors, other disqualified persons, and their family members were excluded. Payments would go directly to the school, with second-semester funding dependent on transcripts and continued academic standing. 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 scholarships for local high school graduates qualify for advance approval under IRC § 4945(g)(1)?
• 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

Release Number: 201710038
Release Date: 3/10/2017
Date: December 6, 2016

Employer Identification Number:
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

C= Name of High School

D= Location

• = Minimum amount of scholarship
f = Endowment value

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)).

Letter 4792 (10-2012)

Catalog Number 58263T

Description of your request
Your letter indicates that you will operate an educational scholarship program.

The purpose of the program is to provide scholarships to worthy graduates of C in D to
attend college or university. You will not provide educational loans.

Graduating seniors with a 2.5 GPA and a desire to further their education are eligible for
the scholarships. Criteria used are academic performance, involvement in school and
community activities, and financial need.

There are no specific solicitation or announcement materials. The scholarship application
is available at the Career Center at C and the career advisor announces what
scholarships are available.

The minimum scholarships shall be $e for a one year period. Six scholarships will be
funded annually. At the end of the first quarter you may make available for scholarship up
to one-half of all non-committed funds that exceed the $f in the trust fund.

In determining eligibility, you will ask for a transcript and ACT/SAT data from the school.
You will also request two letters of reference, one from a teacher and one from a person
not affiliated with the high school, assessing strengths and weaknesses in regards to
character, abilities and desire to learn and work ethic. In addition, the candidate must
write an essay explaining why he or she should be awarded this scholarship and what
distinguishes him or her from the other applicants.

The following individuals shall not be eligible to apply for or receive an scholarship: (a)
your employees or their family members; (b) your executives, officers, or directors, or
their family members; and (c) any otherwise “disqualified person” with respect to you as
defined by Section 4946 of the Internal Revenue Code, or family members.

At no time in the scholarship application process will you discriminate against any
applicant on the basis of race, religion, creed, color, sex, age, physical or mental
disabilities, sexual orientation or national origin.

The recipients of the scholarship shall be chosen by a selection committee, with the
assistance of your officers and/or employees assigned to assist with the operation of the
scholarship. The selection committee consists of five members of the Board of Trustees
appointed by the President and the President herself. The President fills vacancies on the
committee by appointing replacements.

When each recipient has provided your treasurer with the name of the college or
university he or she will attend and a copy of the admittance letter, the treasurer
disburses funds for the first semester. Recipients must send the treasurer a transcript of
first semester grades before you pay for the second semester. You pay the funds directly
to the college or university and they apply the funds to the enrolled student in good

Letter 4792 (10-2012)
Catalog Number 58263T

standing. The school monitors the grade point average of the student and if the 2.5 GPA
is not maintained the funds are not released. A student who does not maintain the
required GPA but contacts you will be granted a probationary period to bring up the grade
point average. If it is clear that the student will not meet the GPA requirement the school
returns the funds to you.

The Treasurer maintains the recipient's name, address, what college or university’ they
attend, the amount of the scholarship and the dates of disbursements. You will maintain
all records relating to individual scholarship grants, including information obtained to
evaluate scholarship grantees, identify whether a scholarship grantee is a disqualified
person, establish the amount and purpose of each scholarship grant, and establish that
you undertook the supervision and investigation of scholarships.

You will arrange to receive and review scholarship grantee reports annually and upon
completion of the purpose for which the scholarship grant was awarded. You will
investigate diversions of funds from their intended purposes, and take all reasonable and
appropriate steps to recover diverted funds, I ensure other scholarship grant funds held
by a scholarship grantee are used for their intended purposes, and withhold further
payments to scholarship grantees until you obtain scholarship grantees’ assurances that
future diversions will not occur and that scholarship grantees will take 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
scholarship grant to an individual for travel, study, or other similar purposes. However, a
scholarship grant that meets all of the following requirements of Code section 4945(g) is
not a taxable expenditure.

• The foundation awards the scholarship grant on an objective and
nondiscriminatory basis.

• The IRS approves in advance the procedure for awarding the scholarship grant.

• The grant is a scholarship or fellowship subject to the provisions of Code section
117(a).

• The scholarship 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 scholarship program described above. This
approval will apply to succeeding scholarship 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.

Letter 4792 (10-2012)
Catalog Number 58263T

• 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 scholarship 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 scholarship 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 scholarship 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