Scholarship grant procedures approved for a private foundation

Plain-English summary

A private foundation asked the IRS to approve its procedures for scholarships to high school seniors who have been accepted by qualifying U.S. universities but lack the resources to attend. A selection panel will consider academic achievement, character, motivation, and financial need, while the foundation's board will choose the recipients and award amounts. The foundation will pay universities directly, monitor recipients annually, and generally require a 3.0 grade point average for renewal. Insiders and disqualified persons cannot receive awards. The IRS approved the procedures under IRC § 4945(g)(1), so grants made under them will not be taxable expenditures. Awards used for qualified tuition and related expenses may also be excluded from recipients' income under IRC § 117, subject to that section's limits.

Ruling snapshot

• Question: Do the foundation's scholarship procedures satisfy the advance-approval requirements for grants to individuals?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g)(1)

Full text (IRS public release)

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

Number: 201901008 Employer Identification Number:

Release Date: 1/4/2019
Contact person - ID number:

Contact telephone number:

Date: October 11, 2018

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 Section 4945(g)(1) of the Code. 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 Section 117(b) of the Code).

Description of your request

You will operate a scholarship program whose purpose is to provide scholarships to
recipients for tuition and related expenses required to attend an educational institution
domiciled in the United States and described in Section 170(b)(1)(A)(ii) of the Code. The
proceeds from you are to be used to cover tuition, including, housing expenses, books
and supplies, and other expenses associated with attending university. If a scholarship
recipient has been awarded direct financial aid grants by a university, such grants shall
be supplemented by you to cover the remaining balance of the recipient’s tuition and
related expenses.

You will increase or decrease the number of grants awarded each year, based upon the
number of qualified applicants the program attracts and the availability of funds. Your
scholarships are renewable for succeeding academic years. To retain the scholarship for
succeeding years, the recipient must maintain at least a 3.0 grade point average.
However, you may waive the requirement if you determine that the recipient shows
sufficient academic potential that it is willing to continue the scholarship.

An eligible candidate must be a high school senior who has been accepted to a qualifying
university as described in Section 170(b)(1)(A)(ii) of the Code, but lacks the financial
resources to attend.

Recipients will be chosen by a selection panel. The panel will be composed of at least
three (3) individuals selected by you, who may or may not be members of your Board of
Directors. The individuals on the selection panel will not be eligible to receive any grants
from the proposed program and they will not otherwise be able to derive a private benefit,
directly or indirectly, if certain potential recipients are selected over others. The selection
panel members will be required to disclose any relationships that may have an impact on
their independence in selecting scholarship recipients.

The selection panel will evaluate all applicants by considering a candidate’s academic
achievement, moral character, motivation, and financial need. The selection panel may
also include consideration of a candidate’s writings and personal interviews.
Determinations of academic admissibility and financial need will be based on information
deemed pertinent by you, but may include high school transcripts, resumes, results of
aptitude or achievement tests, recommendations of teachers or advisors, and financial
information provided by the candidate and/or his or her family.

The selection panel will propose grantees to your Board of Directors. After reviewing the
selection panel’s proposals, your Board will make the final selection of recipients. Your
Board may accept any, all, or none of the proposed grantees and determine the amounts
to be awarded to each.

Funds will be paid directly to the universities on an annual basis to defray tuition and
other related costs only if the recipient is enrolled at the university, in good standing, and
he or she maintains the qualifying grade point average, which shall be verified and
reported to you by the university.

In the event a student withdraws from school, to the extent tuition is refundable, funds will
be returned. A student who does not comply with the renewal criteria will not be eligible
for funds in future years.

On an annual basis, each recipient must submit a copy of their transcript from the
university which details the courses taken and the grade point average achieved.

If you do not receive a report within ninety (90) days of the conclusion of the university’s
school year, you will initiate an investigation and require the recipient furnish you with
such report.

You will arrange to receive and review grantee reports annually. If you determine that any
part of a grant has been used for improper purposes, you will (1) secure the grantee’s
assurance that all funds will be rebated by the application of those funds to the purposes
of the grant and that future diversions will not occur, (2) require that funds which cannot
be applied to the purposes of the grant be rebated to you, and (3) require the grantee to
take extraordinary precautions to prevent future diversions from occurring.

No scholarship or other grant will be awarded to a member of your Board or to any
disqualified person with respect to you (including any individuals related to members of
your Board and any persons related to the substantial contributors to you). No
scholarship or other grant will be awarded for a purpose that is inconsistent with the
purposes described in Section 170(c)(2)(B) of the Code.

You will maintain case histories including: the recipient's name, address, the materials
used in evaluating his or her candidacy or proposal, the purpose and amount of the
award, the manner of solicitation, and the relationship (if any) to officers, Board of
Directors, or the founder of or substantial contributor to you.

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.

• 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