IRS approves renewable college scholarships for graduating seniors

Plain-English summary

A private foundation proposed scholarships for graduating seniors from a specified school who had been admitted to college, generally targeting students with at least a 3.0 GPA. Selection would consider academic performance, test scores, recommendations, financial need, motivation, and character, with a preference for students attending a specified school. Awards could cover tuition, room and board, fees, and other traditional education costs and could be renewed for as many as four academic years. The foundation would pay schools directly and receive semiannual enrollment, course, and grade reports. The IRS approved the procedures under IRC Section 4945(g)(1), so compliant awards would not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation's renewable college-scholarship procedures qualify for advance approval?
• Outcome: approved
• Key authorities: IRC §§ 4945(g)(1), 117(a), 117(b), 170(b)(1)(A)(ii); Treas. Reg. § 53.4945-4(c)(5)

Full text (IRS public release)

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

Number: 201809013 Employer Identification Number:

Release Date: 3/2/2018
Contact person - ID number:

Contact telephone number:
Date: December 6, 2017

LEGEND UIL: 4945.04-04
X= School

Y= School

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 provided in Code Section 117(b)).

Description of your request

Your letter indicates you will operate an educational program to make grants to assist
students from X to attend Y or the college or university of their choosing although
preference will be given to those attending Y. The grants will cover the cost of tuition,
room and board, fees and other traditional education costs and not fund research or other
projects. In general, you intend to make up to four grants annually of up to approximately
z dollars each. However, the number of grants, and the amount of each grant, may vary
from year to year depending on the number of qualified applicants.

Letter 4792 (10-2012)
Catalog Number 58263T

You will disseminate information about your program to teachers, counselors,
administrators and other representatives of X. In addition, you plan to solicit applicants
through your personal contacts and letters to possible candidates.

To be eligible for your program, an applicant must be a graduating senior attending X
with a target 3.0 GPA or higher, who has been accepted to a college or university.
Relatives of members of the selection committee, your officers, directors, or substantial
contributors are not eligible for your program.

Eligible applicants must submit an application by a specific date to X’s counseling office
with supporting documents including transcripts, letters of reference, community service
documentation, college acceptance letters, scholarships from other sources and other
information that you deem necessary in the selection process. Applicants must also
prepare a statement on why they should be awarded the scholarship. In addition, you
may require applicants to demonstrate financial need.

Your selection committee, which will consist of one or more of your directors and may
also include persons not affiliated with you who are knowledgeable in the field of
education, will make the final selection of the recipients. To narrow the field to a smaller
number of applicants, you may appoint members of the X staff to conduct a preliminary
screening to select the best qualified applicants. These selected applicants may then be
asked to meet with one or more selection committee members in person or by telephone
as part of the evaluation process.

Your selection committee will base the final selection of the recipients on factors including
prior academic performance, performance on standardized tests, recommendations from
instructors or other individuals not related to the potential recipients, financial need, and
conclusions drawn from the applicant's application package and personal interviews as to
motivation and character. In addition, your selection committee will give preference to
applicants planning to attend Y and will have flexibility to authorize grants to applicants
whose GPA is below 3.0.

You will send the recipients an award letter to specify the terms and conditions for each
grant. The recipients must sign and return a copy of that letter to you indicating their
acceptance of the terms of the grant. Examples of terms and conditions specified in the
letter will include the specific purpose of the grant, its duration, the total amount of the
grant, the payment schedule for the grant, and if applicable requirements for reports,
including due dates for the reports.

Grants are renewable up to four academic years as long as the recipient maintains a
minimum GPA of 3.0 or higher. In rare cases, you will have the flexibility to renew grants
for recipients whose GPA falls below 3.0.

In all instances, you will pay the scholarship directly to the educational institution who
must agree to use the grant funds to defray the recipient’s expenses or to pay the funds
to the recipient only if the recipient is enrolled at such educational institution and their

Letter 4792 (10-2012)
Catalog Number 58263T

standing at such educational institution is consistent with the purposes and conditions of
the grant. You will rely on the educational institution to provide you a semi-annual
confirmation report to assure you that the requirements of the grant are being met and if
not, to advise you of the recipient's failure to meet the requirements. The reports will also
show the recipient's courses taken and grades received (if any) in each academic period.

Because you are using the procedures for the supervision of grants described in Treas.
Reg 53.4945-4(c)(5) you have not made any provisions for the investigation of
jeopardized grants.

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

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.

e 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

Letter 4792 (10-2012)
Catalog Number 58263T

• 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