Community-leadership scholarship procedures approved

Plain-English summary

A private foundation proposed scholarships for students ages 13 through 25 who lived in one of seven counties and showed community leadership and volunteer service. A selection committee would consider service history, school enrollment, references, applicant-led service activities, and a proposed plan to benefit the community, while descendants and spouses of insiders were excluded. Grants of up to a redacted amount would be paid directly to accredited schools and could be deferred until a recipient had educational need, with enrollment, transcript, narrative-report, and diversion-recovery safeguards. The IRS approved the procedures under section 4945(g)(1), so compliant scholarship expenditures would not be taxable expenditures.

Ruling snapshot

• Question: Did the foundation's proposed community-leadership scholarship procedures satisfy the advance-approval requirements?
• Outcome: approved
• Key authorities: IRC §§ 117(a)-(b), 170(b)(1)(A)(ii), 170(c)(2)(B), 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: 201716050
Release Date: 4/21/2017                           Employer Identification Number:
Date: January 25, 2017

                                                  Contact person - ID number:

                                                  Contact telephone number:

LEGEND                                           UIL: 4945.04-04
X = Program
Y = State
z dollars = 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 letter indicates you will operate a scholarship program called X. The purpose of X is
to identify and reward young leaders who are likely to make a positive impact on their
community.

To be eligible for consideration the applicant must meet the following minimum criteria:

• Applicant must be at least 13 years old, no older than 25 years old, and enrolled in a
  middle school, high school, community college, or university.

• Application must be submitted online.

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• Applicant must provide contact information, including e-mail address and telephone
  number, and complete the application in full.

• Applicant must maintain his or her primary residence in one of seven specific counties
  in the State of Y

• Applicant must submit nomination in either English or Spanish.

• Applicant must submit the required information regarding the educational institution at
  which he or she would like to use the funds.

The selection process will be completely non-discriminatory with respect to race, religion,
and ethnic origin. Recipients will be selected based on the following criteria by a
selection committee:

• Past community service and volunteerism

• Enrollment in middle school, high school, college or university

• Strength of reference letters from school

• The degree to which the recipient has planned and/or organized a service activity
  which has clearly benefitted other people in the community

• The degree to which the service activity was initiated and motivated primarily by the
  applicant; the activity may not have been done solely to complete an assignment for
  school or work

• The degree to which the recipient has come up with a community plan that will make
  a special and significant impact on individuals, families or the community- at-large.

You will not consider an application from any person who is a descendant or their spouse
to any of your officers, trustees, donors, or member of the selection committee.

Each scholarship grant will be in an amount up to z dollars to be used for tuition, fees,
and other course-related expenses such as books, supplies and equipment, at an
accredited middle school, high school, college (including community colleges), or
university at which the recipient is a candidate for a degree or diploma. If there is no
present financial need, or if the present financial need is less than z dollars, you reserve
the right to defer some or all of the amount by which the present scholarship grant falls
short of z dollars until a future year when the recipient does need the funds for education,
and use that deferred amount to fund a scholarship grant for the recipient’s benefit at that
time.

You expect to make grant payments directly to the educational institution with instructions
that the grant is made subject to the condition that the recipient is an enrolled student in
good standing. Further, the grant terms will require the student to send a narrative report,
and will require either the student or the school to send a copy of the transcript at the end
of the school year. In an unusual situation when the grant is made to an educational
institution to pay the tuition or other expenses and the recipient does not attend that
institution, the terms of the grant will require the institution to repay the grant funds to you
to the extent they are not used for the intended purpose.

You represent that you will complete the following: (1) arrange to receive and review

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grantee reports annually and upon completion of the purpose for which the grant was
awarded, (2) investigate diversion of funds from their intended purposes, and (3) take all
reasonable and appropriate steps to recover the diverted funds, ensure other grant funds
held by a grantee are used for their intended purposes, and (4) 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 diversion from
occurring.

You represent that you will maintain the following: (1) all records relating to individual
grants including information obtained to evaluate grantees, (2) identify a grantee is a
disqualified person, (3) establish the amount and purpose of each grant, and (4) 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).

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.

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• 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)
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