Private high school scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed scholarships to help academically promising students pay tuition at private high schools. It would publicize the program through schools, churches, and electronic channels, then select recipients using academic credentials, extracurricular activities, financial need, community ties, and references. Insiders and their family members were excluded, payments would go directly to the school, and the foundation would monitor transcripts and investigate misuse. The IRS approved the procedures under section 4945(g)(1), so awards made as proposed would not be taxable expenditures. Qualifying tuition-related awards could also be excluded from recipients' income under section 117.

Ruling snapshot

• Question: Do the foundation's private high school 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

Number: 201711013 Employer Identification Number:

Release Date: 3/17/2017
Contact person - ID number:

Date: December 23, 2016 Contact telephone number:

LEGEND UIL: 4945.04-04
z= 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
Your letter indicates you will operate a scholarship program to help students with the cost
of tuition at private high schools.

You will seek to assist individuals who have demonstrated potential for academic
excellence. You will determine grant amounts on a case by case basis; they are
expected to be approximately $z per recipient per year.

You will publicize your grant program on the website of the secondary school as well as
by identifying educational and religious institutions in the community — including schools
and churches — and provide oral, printed and electronic information about the available
grants.

Letter 4792 (10-2012)
Catalog Number 58263T

To be eligible for consideration for a grant, applicants must meet the following criteria: (1)
applicants must display academic potential and interest in extracurricular activities; (2)
applicants must have been accepted at the secondary school; (3) applicants must be in
good standing with their current academic institution; (4) applicants must be available for
in-person or telephone interviews and must provide personal and academic references;
and (5) must not be a spouse, ancestor, descendant or spouse of a descendant of any
contributor or director to the foundation.

Your directors will determine grants based on the applicant's academic record and other
academic credentials; participation in extracurricular activities; financial need; information
obtained from prior academic advisors and educators; affiliation within the community if
applicable; and references.

Grants will be paid directly to the high school. Recipients must agree to provide reports in
the form of transcripts upon completion of their academic year and to authorize you to
verify information they have submitted in evaluating the use of the grant. When possible,
reports will be obtained from the secondary school. If no report is filed by the recipient, or
if reports indicate that the funds are not being used in furtherance of the purpose of the
grant, you will investigate. While conducting the investigation, you will withhold further
payments from the grantee and will take reasonable steps to recover funds until you have
determined that the funds are being used for their intended purpose.

You also represent that you will ensure other grant funds held by a grantee are used for
their intended purposes and 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 diversions from occurring.

You represent that you will maintain all records relating to individual grants, including
information obtained to evaluate grantees, identify whether a grantee is a disqualified
person, establish the amount and purpose of each grant, and 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).

Letter 4792 (10-2012)
Catalog Number 58263T

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