Technical education scholarship procedures received advance approval

Plain-English summary

A private foundation proposed scholarships for low-income high school graduates pursuing two-year technical degrees or certifications at local community colleges. Applicants had to meet citizenship or residency, economic, academic, enrollment, and financial-aid application requirements. The foundation's board and possible community volunteers would select recipients using objective criteria, while relatives of insiders and other disqualified persons were ineligible. The foundation would monitor academic progress, investigate misuse, withhold further payments when necessary, and seek recovery of diverted funds. The IRS approved the procedures under section 4945(g)(1), so qualifying grants made under the program would not be taxable expenditures.

Ruling snapshot

• Question: Do the proposed technical education scholarship procedures satisfy the advance-approval requirements of section 4945(g)?
• Outcome: approved, while the program operates under the described standards and safeguards
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)

Full text (IRS public release)

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

Number: 201943028
Release Date: 10/25/2019

Employer Identification Number:

Date: July 30, 2019
Contact person - ID number:

Contact telephone number:

LEGEND

T = Scholarship

U = City, State

V = School

w dollars = amount                              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 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

Your letter indicates you will operate a scholarship program called T.

The purpose of T is to promote technical education for low-income high school graduates
in the U area. Scholarships will be awarded for approved two-year technical degree
programs or certifications at U area community colleges. Approved programs include
various career pathways. Scholarship amounts will be approximately w dollars per
semester. Amounts awarded will cover the entire cost of tuition, books and equipment
required for educational courses. You will publicize the scholarship program on your
website and via distribution of applications to principals, counselors, teachers and
administrators in the V District.

Eligibility requirements for the scholarship program include:

• Must be a citizen or legal permanent resident of the United States

• Must meet federal definition of low socio-economic status or eligible for free or
  reduced lunch

• Must have achieved minimum GPA (grade point average) requirements

• Must plan to enroll in a two-year technical program at local community college

• Must complete the FAFSA (Free Application for Federal Student Aid) application
  and submit SAR (Student Aid Report)

Scholarships will be awarded on an objective and nondiscriminatory basis. The selection
criteria will include, but not be limited to, the applicant’s prior academic performance,
character, good citizenship, economic necessity and commitment toward completing the
desired two-year technical degree program. The selection committee will be composed of
your board of directors. They will determine the number of scholarships that will be
funded annually. They may also request community volunteers to join the selection
committee. Relatives of members of the selection committee or officers or directors or
any disqualified person(s) in relation to you will not be eligible to apply under the
program.

Scholarships will be renewed each semester for a maximum of two years, provided the
student maintains a minimum GPA and is making satisfactory progress toward
completion of the two-year program. Progress reports must be submitted each semester
and the information will be verified with the educational institution. Upon completion of the
degree or certification, a final report is required. If the terms of the scholarship are
violated by the recipient, you will withhold further payments until it is determined that the
scholarship recipient is once again complying with the terms. If the recipient does not
comply, the scholarship will be forfeited, and reasonable steps taken to recover grant
funds.

You represent that you will complete the following: (1) arrange to receive and review
grantee reports annually and upon completion of the purpose for which the grant was
awarded, (2) investigate diversion of funds from their intended purposes, and (3) take all
reasonable and appropriate steps to recover the diverted funds, ensure other grant funds
held by a grantee are used for their intended purposes, and (4) withhold further payments
to grantees until you obtain grantees’ assurances that future diversions will not occur and
that grantees will take extraordinary precautions to prevent future diversions from
occurring.

You represent that you will maintain the following: (1) all records relating to individual
grants including information to evaluate grantees, (2) identify a grantee is a disqualified
person, (3) establish the amount and purpose of each grant, and (4) establish that you
undertook the supervision and investigation of 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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements