Private foundation scholarship procedures approved

Plain-English summary

A private foundation sought advance approval for a scholarship program serving graduates of a public high school. An independent school committee would nominate students, the foundation's trustees would select recipients using academic, personal, and financial criteria, and awards would generally cover unmet education costs. The foundation would monitor enrollment and academic progress, maintain grant records, and exclude disqualified persons and relatives of committee members. The IRS approved the procedures as objective and nondiscriminatory under IRC § 4945(g)(1), so grants made under them would not be taxable expenditures. Awards used for qualified tuition and related expenses also would not be taxable to recipients, subject to IRC § 117(b).

Ruling snapshot

• Question: Do the foundation's procedures qualify for advance approval of an individual scholarship program under section 4945(g)?
• Outcome: Approved. Scholarships awarded under the proposed procedures will not be taxable expenditures.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), 4946

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Number: 201719028 Employer Identification Number:
Release Date: 5/12/2017
Contact person - ID number:

                                                Contact telephone number:

Date: February 17, 2017

LEGEND UIL: 4945.04-04

B = Program
C = City
D = School
E = Organization

x dollars = Amount
y = Number

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 provided in Code section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program called B.

One of your primary goals is to help young people overcome socioeconomic barriers through
education by contributing to the steadily growing number of young people in the C metropolitan
area who overcome these barriers to graduate from public high school, and then from college,
prepared for meaningful employment and active civic participation.

The purpose of B is to provide financial awards as necessary directly to support D High School
graduates who will attend educational institutions that are described in Section 170(b)(1)(A)(ii)
of the Code (“Educational Institutions”) to allow such graduates an achievable, largely debt-
free path to an Associate’s or Bachelor's degree. The number of awards made each year will
depend on the size of the applicant pool, the qualifications and needs of the candidates and
the funds available to you. Each financial award will be for up to x dollars per academic year
(based on current costs, to be adjusted in line with increases in the costs participants will
incur), with the award amount to be determined based on the need of the applicant, for a two-
year or four-year course of undergraduate study at an educational institution described in
Section 170(b)(1)(A)(ii) of the Code for up to the four years of that course. Recipients of
financial awards will also receive ongoing counselling, support, and advice from a
representative of E (an independent nationally recognized college success program or a
similar organization or counselor.

B will be publicized through informational material disseminated by you and D High School.
There is no formal application process. Candidates will be nominated by a Nominating
Committee which will consist of representatives of D High School, including one or more senior
guidance counselors, along with college advisors, teachers and other guidance counselors, all
of whom have regular and direct involvement with the students of D High School.

To be considered for an award under B, potential recipients must:

1. Be a D High School graduating senior with an offer of acceptance to an educational
   institution described in Section 170(b)(1)(A)(ii) of the Code to undertake a two-year or
   four-year course of undergraduate study;

2. Have generally earned a cumulative GPA of 2.0 and a class rank in the upper 50
   percent of his or her graduating class. (An applicant with a GPA below 2.0 and class
   rank below 50% may be considered under special circumstances such as an applicant’s
   demonstration of academic potential commensurate within the goals of B. Examples of
   special circumstances include an applicant’s unstable domestic or financial situation or
   other personal issues causing the applicant’s grades to have suffered);

3. Provide recommendations from two individuals, at least one of which must be an
   academic (such as a teacher, guidance counselor or administrator). These
   recommendations may be provided orally unless the Nominating Committee requests
   that such recommendations be in writing or if the applicant wishes to do so; if the
   recommendations are not in writing, the Nominating Committee will maintain a record of
   such recommendations;

4. Provide a writing sample (such as an essay or other written work) which demonstrates
   the academic potential of the applicant, if the applicant is requested to do so by the
   Nominating Committee or if the applicant wishes to do so;

5. Potentially have an unmet financial need in relation to the costs of undertaking a two-
   year or four-year course of undergraduate study; if a participant’s total costs of
   attendance are covered by awards through the Free Application for Federal Student Aid
   (“FAFSA”) and the Tuition Assistance Program (“TAP”) awards, there will be no financial
   award component for the participant.

6. Agree to a personal interview with one or more members of the Nominating Committee
   and, separately, to one or more members of the Selection Committee.

7. Agree to regularly participate in a mentoring/advising program while attending college;

8. Agree to file the FAFSA and TAP applications annually, if eligible;

9. Not be related by blood or marriage to anyone serving on the Nominating and Selection
   committee as well not be a “disqualified person” within the meaning of Section 4946 of
   the Code.

The Nominating Committee will assess students at D High School to determine whether they
satisfy the eligibility criteria and then will select students on a rolling basis and send its
recommendations to your Selection Committee made up of your trustees who will review the
recommended candidates using the following criteria:

(i) The information about the student considered by the Nominating Committee which will
include the transcripts of the student; it may also include the writing sample in cases
in which the Nominating Committee asked for such samples to be provided or the
student chose to provide such a sample;

(ii) The prior academic performance of the student and the future academic potential of the
student;

(iii) The positive recommendations from teachers or coaches; and

(iv) The conclusions from the reports of the personal interview with the student provided by
one or more members of the Selection Committee regarding such student’s
demonstrated determination to succeed in college and life, and capability to continue
education through the two-year or four-year course of undergraduate study.

On the basis of its review, the Selection Committee will select the recipients and will
subsequently set the amount of each financial award. The award amount will be based on the
difference between (1) the direct costs of the course of study plus an allowance for books and
other supplies, and (2) the aggregate amount covered by college financial aid awards, FAFSA,
TAP and any other equivalent program. The “direct costs” for a participant who commutes to
the relevant educational institution include (i) tuition, (ii) fees, (iii) textbooks and supplies, and
(iv) transportation costs equivalent to a monthly bus or train pass for the time attending such
institution. For a participant who resides at the relevant educational institution, the “direct
costs” include (i) tuition, (ii) fees, (iii) accommodation (equivalent to the cost of living in a
double room at such institution), (iv) health insurance premium for a B participant who is
unable to provide a waiver indicating that he or she already has health insurance coverage, (v)
board (the cost of meals provided by the participant’s college or accommodation or otherwise),
and (vi) textbooks and supplies. On a case-by-case basis, applicants may request additional
financial assistance for winter or summer semesters of study and for emergency funding to
cover personal needs if the financial hardship of the participant prevents him or her from
meeting the basic necessities of life.

For some participants in B, the costs of attendance will be fully covered by awards through
FAFSA and TAP. In such cases, because such participant has no unmet financial need, no
financial award will be provided. However, you may still arrange for the provision of ongoing
counselling support and advice from representatives of E or a similar organization or
counselor.

Participants will be required to complete semiannual reviews, submit transcripts at the end of
each semester, and receive ongoing counseling so that you may monitor the participants’
compliance with the terms and conditions of the grant and insure the grants are being used for
their intended purpose. The continuation of the grant from year to year is conditioned upon the
participant’s continued enrollment in an undergraduate degree program and the participant’s
satisfactory academic performance.

The participant is expected to demonstrate an ongoing accumulation of credits towards his or
her degree and a minimum GPA of y. If the participant’s GPA falls below y, the participant
should develop a plan in conjunction with his or her representative of E, or a similar
organization or counselor, to demonstrate improvement over the following semester. If the
participant does not demonstrate academic improvement over such semester, the participant
may lose his or her eligibility to participate in B.

On a case-by-case basis, you may allow for an interruption of a B recipient’s education without
a corresponding loss of funds if the interruption is for a good cause (e.g., illness or family
issues). You may also, for good cause shown, permit participation in B for undergraduate
education to continue for more than four years to accommodate dual majors, degrees such as
engineering that often require a fifth year, or participants who switch majors.

B participation is intended solely to enable worthy individuals to obtain an undergraduate
education. No B participant will be required to enroll in any particular undergraduate or
graduate program or to study any particular subject. Although B is available only at certain
educational institutions as determined by you, each participant will have the choice to use the
award in the pursuit of any course of undergraduate study he or she chooses.

You will retain records pertaining to all B participants, including all information secured by the
Selection Committee to evaluate the applicants’ qualifications, to ensure that funds are applied
in furtherance of the purposes of B and you. To the extent possible, grants will be paid by you
directly to the relevant educational institution on account of the fees such institution charges
and the costs of other items covered by the grant. In such case, you will retain all
documentation provided by the relevant educational institution pertaining to receipt of fees and
application thereof to such participant’s direct costs.

If grant funds awarded cannot be paid directly to the participant’s educational institution, you
will pay such grant funds to the participant’s personal college account or to the participant
directly to be used to meet his or her direct costs. The status of each participant’s grant will be
reviewed twice annually by you and the educational institution to ensure continuing compliance
with the terms of the grant and to ensure such grant is used in furtherance of the purposes of B
and you.

The focus of B is the students of C High School but in the future it is possible that the students
of other high schools will be assisted in the same way. If you determine that the students of
other high schools should be assisted, a similar process will be implemented in conjunction
with the relevant high school. An independent Nominating Committee will be established
comprised of representatives of the high school who will recommend students to the Selection
Committee, and the students will be assessed in accordance with the same objective and
nondiscriminatory criteria as that for B.

You provided a written statement that you will maintain the following: (1) Information used to
evaluate the qualifications of potential grantees; (2) Identification of the grantees (including any
relationship of any grantee to you), the amount and purpose of each grant; and (3) All grantee
reports and other follow-up data obtained in administering B.

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.

• 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