Renewable college scholarship procedures approved

Plain-English summary

A private operating foundation sought approval for a renewable college scholarship program serving high school students in its local area. Applicants had to rank in the top ten percent of their class, meet a standardized-test threshold, show financial need and school involvement, and submit supporting records. An independent review process considered objective criteria, and recipients had to maintain a 3.2 GPA and full-time enrollment for renewal. The IRS approved the procedures under section 4945(g)(1), so grants made under them would not be taxable expenditures. Awards used for qualified tuition and related expenses could also be excluded from recipients' income under section 117.

Ruling snapshot

• Question: Did the foundation's procedures for renewable college scholarships satisfy the advance-approval rules?
• Outcome: Approved.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), and 501(c)(3).

Full text (IRS public release)

Transcriber's note: this document is a five-page scan. All page images were checked. Obvious OCR errors were corrected, repeated page numbers and form footers were omitted, and blank identifying fields remain blank. Original wording and typographical irregularities are preserved.

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

Release Number: 201906016
Release Date: 2/8/2019
Employer Identification Number:

Date: November 14, 2018
Contact person - ID number:

Contact telephone number:

LEGEND UIL

B = Name 4945.04-04
C = Year
x = Amount
y 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 Section 4945(g)(1) of the Internal Revenue Code (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 Code Section 117(b)).

Description of your request

Your letter indicates you have been operating a scholarship program. You were
established several years ago as a public charity with the sole purpose of providing
higher education scholarships to exceptional young men and women in B, who exhibit
academic excellence, special talents, community involvement, and financial need. In C,
you received a large bequest and you subsequently became a private operating
foundation.

Under your program, you will award x scholarships for y dollars to B area high school
students who demonstrate strong commitments to their communities as well as strength
of character. Recipients must use scholarships for tuition and fees at an educational
institution of higher learning described in Section 170(b)(1)(A)(ii) of the Code. Scholarship
funds may not be used for any non-qualified scholarship purpose, including the limitations
provided for in Section 117(c) of the Code, such as student housing or living expenses.
These can be renewed for three additional years provided the recipients continue to meet
the qualifications for the scholarship.

To be eligible for a scholarship, applicants must:

• Graduate in the top ten percent of their high school class,
• Have obtained an SAT score of at least 1300 or the ACT equivalent of such score,
• Show financial need,
• Show outstanding involvement in school activities,
• Submit your application found on your website by a specific due date with all
required supporting materials including transcripts, the FAFSA form with
estimated family contribution and copies of ACT and /or SAT scores.

All application materials are reviewed and evaluated by The Application Review
Committee of your Board of Trustees, who will select recipients by using objective
criteria. These criteria may include financial need, academic achievement, work
experience, meritorious accomplishment, other prizes and awards received, other
scholarships or grant funding received, performance on standardized aptitude tests, third-
party recommendations, and evidence as to the individual's motivation, character, ability
and potential made from recommendations or a personal interview (if conducted).
Furthermore, the student’s financial need will generally be given great weight in the
selection process. The committee will also select those recipients who best demonstrate
outstanding character, ability, leadership qualities, and academic and extracurricular
achievement.

Upon awarding of the scholarship, you will provide each recipient a letter explaining the
terms of the scholarship. Furthermore, before the initial payment of scholarship funds,
you will obtain a report from the high school or institution of higher education confirming
the recipient’s graduation. You reserve the right to pay all scholarship awards for study
directly to the attending college, university or other institution of higher education or
directly to the grantee. The educational institution must agree to use the funds received
on behalf of the student to defray their tuition and related expenses. You will only make
payment only upon presentation of invoices. If payment is made directly to the grantee,
proof of payment to the attending educational institution must be provided to you. By
accepting the funds, the recipient agrees that the disbursed funds are to be used only to
pay tuition and fees to a higher educational institution described in Section 501(c)(3) of
the Code.

To renew the award, the recipient must provide you a copy of their transcript showing a
minimum 3.2 GPA for each grading period. Furthermore, awards may not be renewed if
the recipient is placed on academic and/or disciplinary probation or if they do not enroll
full-time in a program of study for the semester or quarter in which the award is to be in
effect.

In addition, scholarships may be deferred for up to one year in extenuating circumstances
provided the college or university also grants a deferral for the same time period.
Recipients who want to defer their scholarship must contact you in writing explaining the
reasons for the deferment and when they intend to enroll. You may then request
additional information or proof of extenuating circumstances and reserve the right to deny
the request, in which case the recipient would forfeit the scholarship.

You will obtain a copy of each recipient’s grade report from the college, university or
higher educational institution concerning the courses taken and grades received for each
academic period. Upon completion of a recipient's study at a college, university or higher
educational institution, a final grade report will also be obtained. In all cases, you reserve
the right to request additional information in any scholarship report and to request
independent verification of any facts submitted in such a report, including conducting
personal interviews or site visits with grantees and/or their supervising faculty or mentor.

If you believe the scholarship funds have been used for an improper purpose or that the
grantee has diverted funds for a purpose other than that for which the scholarship has
been granted, you will take all reasonable and appropriate steps to recover such funds
from the grantee. You will withhold further payments until you have been assured that
scholarship funds have not been used for an improper purpose. Such assurances shall
include written assurances from the recipient’s supervising faculty or mentor that such
future diversions of scholarship funds for an improper purpose will not occur, as well as
the recipient’s agreement to the implementation of certain precautionary procedures to
prevent any possible future diversions, such as funding only on a reimbursement basis,
funding only invoices pre-approved by you, and/or funding directly to a higher
educational institution which commits in writing only to fund expenses for those purposes
for which the scholarship or grant was awarded. In no event will you award further
scholarships to a grantee who has diverted prior scholarships to an improper purpose
unless a written plan of restitution for those funds diverted is agreed to by the grantee.

You will all retain all information used to evaluate the qualifications of potential grantees.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(Internal Revenue 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 Internal Revenue 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 Internal
Revenue Code Section 117(a).
• The grant is to be used for study at an educational organization described in
Internal Revenue 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.

• The effective date of this ruling is August 11, [redacted].

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