Foster-care student scholarship programs receive advance approval

Plain-English summary

A private foundation proposed two scholarship programs for high school graduates who were in foster care, had previously experienced foster care, or faced similar disadvantages. One program would serve participants in an exempt mentoring organization and specified college pathways, while the other would serve low-income or disadvantaged students attending two-year or four-year institutions in the state. Independent selection committees would consider financial need, and for the second program academic achievement, while excluding the foundation's employees, disqualified persons, and relatives of committee members. Awards would be paid directly to schools and renewed only for students who remained enrolled and in good academic standing. The IRS approved both programs under section 4945(g)(1), so payments made under the approved procedures would not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation's two scholarship programs for students affected by foster care qualify for advance approval under section 4945(g)(1)?
• Outcome: approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), 501(c)(3)

Full text (IRS public release)

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

Release Number: 201742031
Release Date: 10/20/2017 Employer Identification Number:
Date: July 26, 2017

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
B= Program

C= Program

D= Name

E= School name

F= School Name

G= School Name

H= State

J= Name

x dollars= Amount
y dollars= Amount
z= 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)).

Letter 4792 (10-2012)
Catalog Number 58263T


Description of your request

Your letter indicates you will operate two scholarship programs called B and C. Under
both B and C, you will award scholarships to high school graduates who currently are in
foster care, or who have experienced foster care at some time in their lives to help pay
for their study at an educational organization described in Section 170(b)(1)(A)(ii) of the
Code. You plan to fund B at a level of up to approximately x dollars each year, which
would allow up to z students per class to receive a maximum of y dollars per year as long
as they remain in good standing at a qualifying institution of higher education. The
specific amount of the scholarship awarded will depend on the student’s needs and
financial assistance available from other sources. Although the goal is to provide
significant aid to scholarship recipients, the amount is not intended to cover the full cost
of tuition. You have not made any specific funding plans for C, but you expect the
availability and amount of scholarships to be calculated similarly to B.

Under B, you will award scholarships to successful participants of D, a mentoring
organization for students who are in foster care, were formerly in foster care, or are
wards of H. D is exempt under Section 501(c)(3) of the Code. D’s program starts during
the students’ junior year in high school and provides support to these students by
preparing them for the ACT and SAT, by assisting them in applying to college, by
securing financial aid, and by helping them stay focused on their course work during
college. Candidates for the scholarships under B are required to attend either E in H or to
participate in J, a program run in coordination with F and G wherein students earn a two-
year associate degree from F or G and subsequently transfer to E to finish a bachelor’s
degree. You will publicize B through D’s program and through the schools participating in
that program. To be eligible for scholarships granted by B a student must be a
graduating student at an H high school who is participating in B’s program and planning
to attend E or one of the two-year institutions participating in J.

Under C, you plan to provide scholarships to fostered students who have not participated
in D’s program and are low-income or otherwise disadvantaged students. Candidates for
the scholarships granted by C are required to attend any two or four-year degree granting
educational institutions in H. You will publicize C through counselors and administrators
at H high schools and colleges, and/or through written public announcements published
on web sites and various other resources. To be eligible for scholarships under C, a
student is required to be a graduating student at an H high school and is in foster care,
was formerly in foster care, is a ward of H, or who has otherwise experienced hardship
placing him/her at a disadvantage for achieving success in college.

Recipients of B will be chosen based on financial need by a selection committee
consisting of college personnel knowledgeable about education and familiar with B.
Recipients of C will be chosen based on criteria including financial need and academic
achievement by a selection committee consisting of persons with knowledge of C and
interest in serving the identified disadvantaged student populations. For both B and C if a
selection committee member resigns, a replacement will be selected by the remaining
committee members.

Letter 4792 (10-2012)
Catalog Number 58263T


You have not identified selection committee members but none of your employees or
disqualified persons with respect to you will participate on the selection committees. No
relatives of any of the members of the selection committees will be eligible to receive
grants under B or C. No person who is a “disqualified person” with respect to you will be
eligible for a grant.

Scholarship recipients of B and C must remain enrolled and in good academic standing
at a degree-granting institution of post-secondary education to be eligible for a renewal of
the scholarship grant for subsequent years of enrollment. Recipients under B must also
maintain regular contact with their D coaches.

Under both B and C, scholarships will be paid directly to the schools with instructions that
schools must use the funds solely for the purpose of the scholarship. You will require the
schools and/or the students to provide transcripts showing enrollment in good academic
standing.

You represent that you will maintain the following: (1) all records relating to individual
grants including information obtained to evaluate grantees, (2) identify whether 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.

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 diversion from
occurring.

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


• 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