Broad scholarship procedures approved

Plain-English summary

A private foundation proposed scholarships for students ranging from primary and secondary school through graduate and professional education. It would publicize the program broadly, apply objective criteria, use a selection committee with conflict rules, and exclude insiders and other disqualified persons. Awards would generally be paid directly to qualifying educational institutions, and the foundation would require reports, investigate diversions, recover misused funds, and maintain detailed records. The IRS approved the procedures under IRC § 4945(g)(1). Grants made under the approved program would not be taxable expenditures, and qualifying educational expenses could be excluded from recipients' income under IRC § 117.

Ruling snapshot

• Question: Did the proposed scholarship selection, payment, supervision, and recordkeeping procedures qualify for advance approval?
• Outcome: approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g), and 4946(a)

Full text (IRS public release)

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

Release Number: 201728023
Release Date: 7/14/2017 Employer Identification Number:
Date: April 21, 2017

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
Y = State
Z = Club

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. Your will provide scholarship
grants for primary or secondary school students, undergraduate or graduate students at a
college or university conducting research to earn a professional degree or other students
who study at an educational institution that provides programs of study that are creditable
towards a bachelors or higher degree or offers training to prepare a student for gainful
employment.

The criteria for selection will be applied to candidates on an objective and non-
discriminatory basis. The group from which grant recipients are selected will be
sufficiently broad so that giving grants to one or more members of the group fulfills a
charitable purpose; however selection from such a group is not necessary if one or more

Letter 4792 (10-2012)
Catalog Number 58263T

grant recipients are selected on the basis of their exceptional qualifications to carry out
the purposes of the grant or it is otherwise evident that the selection is particularly
calculated to effectuate the charitable purpose of the grant rather than benefitting
designated persons or a particular class of persons.

Criteria that you may use to select grant recipients may include, but are not limited to,
prior academic performance, performance on tests designed to measure aptitude,
recommendations from instructors, additional biographical information on applicant’s
career such as academic and other relevant experiences, financial need, and your
conclusions regarding applicant's motivation, character, ability or potential. You may also
give preference to applicants who attend school in the state of Y, or who have attended a
particular school or who have participated in Z. Preference may also be given to
applicants of a particular sex, race, ethnic background or religion as long as the
preference does not violate public policy.

The availability of the scholarship program will be advertised to the general public by
having your staff or members of the selection committee contact high school, college and
graduate school administrators and managers of relevant community institutions. You
intend to request that these administrators and managers nominate potential candidates
or encourage potential awardees to submit applications for scholarship aid.

You shall appoint members to a selection committee who are charged with the evaluation
of candidates for scholarship grants. All appointments to the committee shall be made by
your board of directors. Each member of the selection committee shall adhere to your
relevant policies as they may be adopted. A member shall disclose any personal
knowledge of and relationship with any potential grantee under consideration and refrain
from participation in the award process. No grant may be awarded to any member of your
board of directors, any substantial contributor, any of your employees or any other
disqualified person as defined in IRC 4946(a). The committee shall forward its
recommendations to your staff who shall furnish the same to your board of directors who
must approve each award made under the program.

Applicants for the scholarship grants shall be required to submit such application forms

and supporting materials as you deem appropriate based on a timeline you will establish.
Grants will ordinarily be awarded for a one year period but may be for a shorter or longer
period and may be renewable for a period appropriate to the purposes of the scholarship.

Scholarship grants shall be used only for qualified tuition and related expenses including
fees, books, supplies and equipment required for courses of instruction, and room and
board. An additional condition is that no part of the scholarship grant shall be used as
payment for teaching, research or other services by the scholarship recipient required as
a condition for receiving the scholarship.

Scholarship grants shall be paid by you directly to the educational institution for the use
of the scholarship recipient. Each educational institution must be described in Internal
Revenue Code 170(b)(1)(A)(ii) and must agree in writing to use the grant funds to defray

Letter 4792 (10-2012)
Catalog Number 58263T

the recipient’s expenses or to pay the funds or portions thereof to the recipient only if the
recipient is enrolled as such educational institution and his or her standing at the
institution is consistent with the purposes and conditions of the grant. You reserve the
right to impose additional, minor reasonable restrictions and/or requirements upon
awarding of scholarship grants and the administration of such grants. Material changes
would need the approval of your board of directors.

Scholarship grant recipients shall be notified after you have given final approval for the
awards. You agree to provide each recipient with a letter notifying him/her of the grant
and specifying that the amounts must be used exclusively for tuition at post-secondary
institutions that normally maintain a regular faculty and curriculum, and for fees, books,
supplies, eligible equipment and for room and board expenses payable to the institution,
unless otherwise agreed to. The letter shall inform the student that no funds will be
disbursed until you receive confirmation that the student is enrolled in the educational
institution at which time funds may be released to the institution. The letter shall also
describe the reporting requirements which the recipient must adhere to and the dates at
which such reports are due back to you. Each recipient shall be required to sign and
return a copy of the letter indicating his/her acceptance of the scholarship and its terms.

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

You represent that you will maintain the following: (1) all records relating to individual
grants including information 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).

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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T