Foundation's two college scholarship programs received advance approval

Plain-English summary

A private foundation requested advance approval for two need-based scholarship programs designed to help students complete college with little or no debt. One program served promising students statewide, while the other focused on graduates of a designated school district. Educational institutions would nominate applicants, but the foundation would select recipients based on financial need and merit, determine award amounts, monitor recipients, and generally pay funds directly to the schools. Awards could cover tuition, room and board, books, and fees, and could be renewed if recipients met enrollment and academic requirements. The IRS approved the procedures under section 4945(g)(1), so grants made as proposed would not be taxable expenditures and could be tax-free to recipients when used for qualified tuition and related expenses.

Ruling snapshot

• Question: Did the foundation's procedures for its two college scholarship programs satisfy the advance-approval rules?
• Outcome: approved, assuming the programs are conducted as proposed
• Key authorities: IRC §§ 117(a), 117(b), 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

Release Number: 201930026                         Employer Identification Number:
Release Date: 7/26/2019                           [redacted]
Date: May 1, 2019
                                                   Contact person - ID number:
                                                   [redacted]

                                                   Contact telephone number:
                                                   [redacted]

LEGEND                                            UIL: 4945.04-04

B = Schools
C = Name
D = Name
E = School System

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 provided in Code Section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program.

The purpose of the program is to allow students with financial need that show promise for
college and career success the opportunity to graduate from college with little to no
student loan debt and obtain a job at a family sustaining wage. This scholarship will
provide for tuition, board and room, books and fees for up to four years at any one of the
schools consisting of B. To date, you have made grants to qualified Section 501(c)(3)
public charities including designated educational institutions consisting of B in order to
fund and administer educational scholarships. These scholarships were given under the
names of C and D. You are now expanding your involvement in C and D by having a
more active role in the selection process, award calculation, and renewal process.
Moreover, the amounts of each award will vary and will generally be equivalent to the
cost of attendance less any other aid, including Pell grants, and private scholarships. In
addition, the number of grants made annually will be determined by calculating the
allocated funds minus the estimated costs of renewals and divided by the estimated
costs for new recipients You will also give consideration to the ratio of awards granted
and the number of qualified applications received each year at each institution to
determine the number of scholarships available for C and D.

Details of C

The goal of C is to help promising students from your state with limited financial means
earn a college degree free of college debt. C will be publicized by you to the financial aid
offices of B and will have a dedicated website which is linked to yours.

To be eligible for an award under C, applicants must be a resident of your state who
show financial need which you will measure by using Federal Pell grant criteria. In
addition, applicants must show outstanding academic achievement in high school, as
measured by their high school rank, and their GPA.

You will determine the amount of each scholarship based on available financial
information from the applicants and this may be done in collaboration with the designated
educational institution. The awards are also renewable for three additional years (for a
total of eight semesters), provided recipients maintain a cumulative G.P.A. of at least 2.5
on a 4.0 scale, and are enrolled on a full-time basis (12 credit hours or more each
semester).

Each designated educational institution will create their own scholarship application forms
consistent with their financial aid process as well as process the applications and
nominate qualified applicants. The names of the nominees and their application
packages will be then forwarded to you.

You will facilitate interviews of all nominees and make the final selection of recipients as
well as determine the amount of each award. The number of nominees requested from
each designated educational institution will be approximately double the number of
anticipated awards to be granted at that institution. You will select the recipients based on
financial need and merit. All recipients will be recognized on your website as well as
through other methods.

Details of D

The initial goal of D is to provide needs-based scholarships to students graduating from a
designated high school in the E school district to complete a two- or four-year college
education at a designated educational institution consisting of B. The majority of students
from the schools in the E school district receive free or reduced- price lunch D is
promoted through a dedicated website with a link to yours. D is also publicized by the
counseling offices of each high school in E who will also distribute applications for D.

To be eligible for D, applicants are to:

• Attend a designated educational institution consisting of B;

• Show a specific GPA;

• Demonstrate significant financial need;

• Show involvement as a community member with strong potential for success in the
  college setting;

• Articulate a plan for their education/career goals.

In addition, applicants must submit a completed application by a specific date with
required attachments including an essay, financial information, and a letter of
recommendation from a teacher to F who will then process the applications and nominate
qualified applicants. The names of the nominees and their application packages will be
then forwarded to you. You may also interview the nominees and will select recipients
based on financial need and merit. Scholarships are renewable as long as the recipients
maintain a specific GPA and are enrolled on a full-time basis as well as submit a
summary of each year’s college experience to you.

Controls for C and D:

You will communicate directly with the recipients regarding expectations of annual
reports, grade updates including a transcript and other needed information. You will also
have a staff member who serves as the primary point of contact for the designated
institutions, recipients, and alumni. The staff member will be responsible for the
management of all aspects of the scholarship programs including its promotion and any
needed collaboration efforts. One goal of this position is to have clearly documented and
consistently implemented processes in place for all scholarships at each of the
designated institutions.

You will generally pay the funds directly to the educational institution who will administer
and manage the scholarships. Further, you will encourage the recipients to work part time
throughout the academic year to contribute to their support, but this is not required.

You represent that you will (1) arrange to receive and review grantee reports monthly, but
no less than quarterly to ensure compliance with the purposes of the grant, (2) make
tuition payments or payments for housing directly to the institution when possible, (3)
distribute and ensure grant funds held by the grantee are used for their intended
purposes, (4) investigate any perceived diversions of funds from their intended purposes
and ensure such actions do not occur in the future, and (5) receive donations from a
limited number of donors who are supportive of your program and provide appropriate
documentation and reporting to donors.

You represent that you will maintain all records related to the following: (1) individual
grants including information used to evaluate grantees, (2) grantees who are identified as
a disqualified person, (3) how the amount and purpose of each grant was established,
and (4) how you established supervision and investigation of the 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.

• 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.

We have sent a copy of this letter to your representative as indicated in your power of
attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements