Scholarship grant procedures received advance approval

Plain-English summary

A nonexempt charitable trust operated a scholarship program for local high school students. A committee of school officials selected recipients using equally weighted scholarship, ability, need, and other-grant criteria; the trustee paid tuition directly to educational institutions, recovered unused funds, and maintained permanent records. The IRS approved the procedures under section 4945(g), ruled that compliant awards would not be taxable expenditures and would be excludable from recipients’ gross income subject to section 117, and granted section 4962 relief from initial taxes for prior program expenditures covered by the determination.

Ruling snapshot

• Request: Advance approval of scholarship procedures and relief from initial taxes for prior grant expenditures
• Outcome: approved, subject to the stated procedures, recordkeeping, charitable-use, and no-material-change conditions
• Key authorities: IRC §§ 117, 4945(g), 4947(a)(1), and 4962; Treas. Reg. §§ 53.4945-1(d)(3) and 53.4945-4(c)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Director, Exempt Organizations P.O. Box 2508, EODQA Rm. 7-008
Rulings and Agreements Cincinnati, Ohio 45201

Release Number: 201940013
Release Date: 10/4/2019
UIL Code: 4945-04-04

Dear

This is in reply to your letter of May 25, 2004, in which you requested a
ruling concerning your grant procedures pursuant to section 4945(g) of the
Internal Revenue Code.

You are a nonexempt charitable trust as described in section 4947(a)(1) of
the Code. Therefore, you are subject to the provisions of chapter 42 of
the Code, specifically as they relate to the advance approval of
scholarship procedures.

Your grant-making program is formed for the purpose of providing and
paying for the tuition of two or more students to a college institution of
their choice. The grant-making program is structured as follows:

• Scholarships are open to all students attending high school in your
city. Applications are mailed to high school counselors of all high
schools located in this area.

• A selection committee, composed of the principals and high school
counselors of all area high schools, selects scholarship winners and
alternate recipients.

• Selection criteria to be used by the committee are weighed equally
upon scholarship, ability, need and other grants received by the
applicants.

• A committee made up of the Superintendent of Schools and the
President of your trustee gives final approval to the recipients
named by the selection committee

• The trustee exercises supervision over the grants by paying the funds
directly to the educational institution rather than to the individual
grantee. Each educational institution receiving the funds must sign
a letter acknowledging that the funds will be deposited for tuition
only to the named students’ accounts. These acknowledgements are
retained in the trustee’s permanent records.

• If the trustee is notified that the student did not attend, the
trustee will recover any funds not used for tuition from the
educational institution and deposit the refunds into the scholarship
account to be used for the next year’s awards.

• The trustee maintains permanent records relating to all scholarships,
including the names of the primary and alternate recipients, their
addresses, social security number, parents’ names, the date and
amount paid and the names and addresses of the educational
institutions attended.

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• The selection committee retains all records relating to the selection
process, including copies of all applications received and
documentation of their evaluation thereof.

Sections 4945(a) and (b) of the Code impose certain excise taxes on
“taxable expenditures” made by a private foundation.

Section 4945(d)(3) of the Code provides that the term "taxable expenditure"
means any amount paid or incurred by a private foundation as a grant to an
individual for travel, study, or other similar purposes by such individual,
unless such grant satisfies the requirements of subsection (g).

Section 4945(g) of the Code provides that section 4945(d)(3) shall not
apply to individual grants awarded on an objective and nondiscriminatory
basis pursuant to a procedure approved in advance if it is demonstrated
that:

(1) The grant constitutes a scholarship or fellowship grant which is
subject to the provisions of section 117(a) and is to be used for
study at an educational organization described in section
170(b)(1)(A)(ii);

(2) The grant constitutes a prize or award which is subject to the
provisions of section 74(b), if the recipient of such prize or
award is selected from the general public, or

(3) The purpose of the grant is to achieve a specific objective,
produce a report or similar product, or improve or enhance a
literary, artistic, musical, scientific, teaching, or other
similar capacity, skill, or talent of the grantee.

Section 53.4945-4(c)(1) of the Regulations provides that to secure
approval, a private foundation must demonstrate that:

(i) Its grant procedure includes an objective and nondiscriminatory
selection process;

(ii) Such procedure is reasonably calculated to result in performance
by grantees of the activities that the grants are intended to
finance; and

(iii) The foundation plans to obtain reports to determine whether the
grantees performed activities that the grants are intended to
finance.

Based on the information submitted and assuming your award programs will be
conducted as proposed with a view to provide objectivity and
nondiscrimination in making the awards, we have determined that your
procedures for granting the awards comply with the requirements contained
in section 4945(g) of the Code and that awards granted in accordance with
such procedures will not constitute "taxable expenditures" within the
meaning of section 4945(d)(3).

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In addition, we have determined that awards made under your procedures are
excludable from the gross income of the recipients subject to the
limitations provided by section 117 of the Code.

You have also requested, under Section 4962 that the Service not assess any
initial taxes under Section 4945 for any expenditure of its grant making
program covered by the determination letter that precedes its effective
date.

Section 4962(a) provides that if it is established to the satisfaction of
the Secretary that (1) a taxable event was due to reasonable cause and not
to willful neglect, and (2) such event was corrected within the correction
period for such event, then any qualified first tier tax imposed with
respect to such event (including interest) shall not be assessed.

Regulations Section 53.4945-1(d)(3) provides that where an expenditure is
taxable under Section 4945(d)(3) only because of a failure to obtain
advance approval of procedures with respect to grants as required by
Section 4945(g), correction may be accomplished by obtaining approval of
the grant making procedures and establishing to the satisfaction of the
Commissioner that:

(i) no grant funds have been diverted to any use not in
furtherance of a purpose specified in the grant;

(ii) the grant making procedures instituted would have been
approved if advance approval of such procedures had been
properly requested; and

(iii) where advance approval of grant making procedure is
subsequently required, such approval will be properly
requested.

You have provided sufficient information to show that it has met the above
requirements. Specifically, you have shown that (1) the procedures
described above do not permit the diversion of grant funds and have not
been substantially changed in prior years; (2) Your grant-making procedures
met all requirements of Section 4945(g) in all subsequent respects for all
prior years except for the failure to obtain advance approval; and (3) You
have now properly requested approval of grant making procedures.

Therefore, according to Section 4962, you are not subject to initial taxes
under Section 4945 for any expenditure of its grant-making program covered
by the determination letter that precedes its effective date.

This determination is conditioned on the understanding that there will be
no material change in the facts upon which it is based. It is further
conditioned on the premise that no grants will be awarded to foundation
managers, or members of the selection committee, or for a purpose that is
inconsistent with the purpose described in section 170(c)(2)(B) of the
Code.

The approval of your award program procedures herein constitutes a one-time
approval of your system standards and procedures designed to result in
awards which meet the requirements of section 4945(g)(1) of the Code. This
determination only covers the grant program described above. Thus,

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approval shall apply to subsequent award programs only as long as the
standards and procedures under which they are conducted do not differ
materially from those described in your request.

Any funds you distribute to individuals must be made on a true charitable
basis in furtherance of the purposes for which you are organized.
Therefore, you should maintain adequate records and case histories so that
any or all award distributions can be substantiated upon request by the
Internal Revenue Service.

This determination is directed only to the organization that requested it.
Section 6110(k)(3) of the Code provides that it may not be used or cited as
a precedent.

You must report any future changes in your grant making procedures. Please
keep a copy of this letter in your permanent records.

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

If you have any questions, please contact the person whose name and
telephone number are shown above.

Sincerely yours,

Lois G. Lerner
Director, Exempt Organizations
Rulings and Agreements