Scholarship procedures for graduates of two schools receive approval

Plain-English summary

A private foundation proposed a scholarship for students who graduated from two specified schools and met stated grade and course-completion requirements. Every qualifying eighth grader at one school could potentially receive an award, and the amount would depend on the student's performance and years at the other school. An independent committee affiliated with a separate organization would review applications, and relatives of committee members and other disqualified persons could not receive awards. Scholarship funds would be paid directly to an accredited college or university and returned if a recipient was not actively enrolled. The IRS approved the procedures under section 4945(g)(1), so compliant awards would not be taxable expenditures and would be tax-free to recipients to the extent used for qualified tuition and related expenses under section 117(b).

Ruling snapshot

• Question: Did the proposed school-based scholarship procedures qualify for advance approval under section 4945(g)(1)?
• Outcome: Approved, subject to the stated procedures and recordkeeping conditions.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g).

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR against all three page images. Obvious OCR misreads were corrected, redacted identifiers are marked [redacted], and wording is otherwise verbatim.

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

Number: 201811017                               Employer Identification Number:
Release Date: 3/16/2018                         [redacted]

                                                Contact person - ID number:
                                                [redacted]
                                                Contact telephone number:
Date: December 18, 2017                        [redacted]

LEGEND:                                         UIL:
B = scholarship                                4945.04-04
C = school
D = school
E = committee
F = organization
w dollars = amount
x = number
y = number

Dear [redacted]:

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

You will operate B to help fund tuition and related, qualified expenses (i.e. books,
required student fees, etc.) for students attending accredited institutions of higher
learning in an amount up to w dollars.

Letter 4792 (10-2012)
Catalog Number 58263T

2

The student must graduate from C with a GPA of x or above. They must also be a
graduate from D. The award amount is determined by the number of years in D in which
the scholar earns a GPA of y or above and passes all courses at D.

Flyers will be given to each 8th grader of C as part of the pre-high school
preparation/selection process at C. Each 8th grader will receive a packet of information
about preparing for high school and the flyer will be part of the packet. All 8th graders at
C who meet the criteria can potentially receive B.

All applications will be reviewed and approved by the E. The criteria for membership in
the E is that all members be involved in the F and are independent of C and D. No
relatives of the selection committee or officers, directors, or substantial contributors will
be eligible for B. Additionally, B will not be provided to disqualified persons, foundation
managers, family members or relatives of these categories of individuals.

You will maintain case histories showing recipients of B, including their names and
addresses, purpose and amount of B, manner of selection and relations (if any) to
officers, trustees or donors.

B will be paid directly to the college or university under an arrangement whereby
scholarship dollars will not be issued in any year in which the student is not actively
enrolled in school. If the student is not actively enrolled in the college or university, there
will be an arrangement whereby the funds will be returned. The student will remain an
active recipient until the award is fully utilized or up to six academic years after high
school.

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.

Letter 4792 (10-2012)
Catalog Number 58263T

3

• 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