Transitional scholarship procedures received advance approval

Plain-English summary

A private foundation designed a scholarship program with partner colleges for people who might not normally receive transitional academic scholarships. Eligible applicants included adults with dependents, adults with physical disabilities, and young adults with histories of abuse, neglect, limited family support, or foster care. The colleges would manage applications and distributions, while the foundation would shape eligibility criteria, appoint a selection-committee member, supervise the awards, and review records and reports. Awards could cover tuition, room and board, fees, books, supplies, travel, and a living allowance. The IRS approved the procedures under section 4945(g)(1), assuming the program operated as described. Compliant expenditures would not be taxable to the foundation, and qualifying awards used for eligible education costs would receive section 117 treatment.

Ruling snapshot

• Question: Did the foundation's college-partnership scholarship procedures satisfy the advance-approval rules for grants to individuals?
• Outcome: approved
• Key authorities: IRC §§ 117, 170, 4945(g), 4946; Treas. Reg. § 53.4945-4

Full text (IRS public release)

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

Release Number: 201736031
Release Date: 9/8/2017
Employer Identification Number:

Date: June 15, 2017
Contact person - ID number:

Contact telephone number

LEGEND

X = Program Name
Y = School Names
Z = Number

UIL: 4945.04-04

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 X.

Your purpose is to provide educational opportunities for individuals who would not
normally receive transitional academic scholarships.

Letter 4792 (10-2012)
Catalog Number 58263T

2

X is collaboration between you and the partner institutions consisting of Y, which are
higher education institutions. Although you may not always be engaged directly in
individual grant making, you have structured X to comply with Code section 4945(g)(1).

You will provide funds to the partner institutions, who will manage the application and
selection process, and make scholarship distributions. In addition, you will provide
significant input with respect to the eligibility criteria. Awards are to be used for the
recipient's expenses incurred in attending an educational institution described in Code
section 170(b)(1)(A)(ii).

You expect to make up to Z annual scholarships through X. The amount awarded will not
exceed the anticipated costs of tuition, room and board, fees, books, supplies, travel
costs, and a living allowance.

You will publicize the availability of the scholarships through direct and indirect contacts
with the general public including through your website, through various charitable and
educational organizations that work with and provide services to youth and other worthy
individuals and through the websites of Y.

The applicants must meet one of the following criteria:

• The applicant must be an adult with dependents in their family unit.

• The applicant must be an adult with physical disabilities.

• The applicant must be a young adult with a history of abuse, neglect, or lack of
family support, and/or experience in foster care.

Applicants will apply for the scholarship by using the partner institution websites.
The scholarship application may request applicants to provide the following information:

• A transcript of prior academic, literary, and/or other achievements,

• A report of performance on tests designed to measure ability and aptitude,

• A description of financial need,

• An essay describing interest and aspirations,

• A list of honors and recognitions,

• Written recommendations from non-related individuals,

• Names of other educational institutions to which the applicant has applied and/or
been accepted.

Each partner institution will have its own selection committee. Each committee will
consist of representatives from the partner institution community and one member you
designate. Members of the selection committee, their spouses, dependents, and other
disqualified individuals are not eligible for the scholarship. The selection committee may
choose scholarship recipients, but not limit their choice, based on prior academic
performance, performance on tests designed to measure ability and aptitude,
recommendations from non-related parties, and personal interviews with the applicant.

Letter 4792 (10-2012)
Catalog Number 58263T

3

You rely on the partner institutions to retain the following written records to be available
for your review:

• All information used to evaluate the qualifications of the applicant,

• The identification of each recipient including any relationship making the recipient
a disqualified person,

• The amount and purpose of the scholarship,

• The reports and other follow-up information obtained.

You will supervise, investigate, and review scholarships to ensure the funds are properly
used by obtaining reports. You will take all reasonable and appropriate steps to recover
any misused funds and ensure any future funds provided to the recipient are properly
used.

To the extent that you manage the application and the selection process directly, you will
retain written records pertaining to all grants awarded including the following:

• All information used to evaluate the qualifications of potential recipients.

• Identification of each recipient (including any relationship of the recipient to make
the recipient a disqualified person within the meaning of Code section 4946(a)(1)).

• Specification of the amount and purpose of each scholarship.

• The reports and other follow-up information obtained under this procedure.

Scholarships that are awarded for regular study at an educational institution described in
Code section 170(b)(I)(A)(ii) generally will continue for the designated term of the
scholarship during the recipient's course of study at such institution, so long as the
recipient maintains satisfactory progress toward completion of his or her course of study
arid otherwise conforms to the terms and conditions of this procedure.

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

Letter 4792 (10-2012)
Catalog Number 58263T

4

• 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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T