Athletic scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed an annual renewable scholarship for a student accepted by a college or university. Applicants had to maintain a B average, participate in varsity sports, and submit an essay, while relatives of insiders and selection-committee members were excluded. The school guidance department would verify eligibility, the foundation's president would make the final selection, and the foundation would monitor enrollment and investigate any misuse of funds. 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 renewable athletic 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: 201711015 Employer Identification Number:

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

Date: December 21, 2016 Contact telephone number:

LEGEND UIL: 4945.04-04

B = Scholarship Program
C = School

D = City and State

f 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

You will operate a scholarship program called the B. Under this program, you will award
one scholarship per year in the amount of f dollars for use towards tuition and/or books at
a four-year college. The scholarship will be renewable as long as the recipient provides
proof of registration or class schedule for the upcoming year. The B will be publicized
through the guidance office of C in D.

To be eligible for an award, potential recipients must meet the following criteria:

• Accepted to a four college or university

Letter 4792 (10-2012)
Catalog Number 58263T

• Maintained a letter grade of a “B” average
• Played at least one year of varsity sports
• Written a short essay about an adult who has influenced their college choice

The above criteria will be verified by the guidance department of C and eligible
applications are then sent to you for final selection.

Award recipients are chosen by your President. You supervise the scholarships by
requiring recipients to provide proof of enrollment each year. If the required paperwork is
not submitted, then no scholarship is awarded. The only way to violate the terms of the
award is to leave school.

Relatives of members of the selection committee, or of your officers, directors, or
substantial contributors are not eligible for awards made under your program.

You will (1) arrange to receive and review grantee reports annually and upon completion
of the purpose for which the grant was awarded, (2) investigate diversions of funds from
their intended purposes, and (3) take all reasonable and appropriate stops to recover
diverted funds, 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 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.

You will maintain case histories showing recipients of your scholarships, fellowships,
educational loans, or other educational grants, including names, addresses, purposes of
awards, amount of each grant, manner of selection, and relationship (if any) to officers,
trustees, or donors of funds to you.

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.

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