IRS approves county-based scholarship procedures

Plain-English summary

A private foundation requested advance approval for a scholarship program serving high school seniors and community college transferees who lived in a specified county and participated in an approved college-readiness program. Applicants needed a minimum 3.0 grade point average, and relatives of foundation insiders or selection committee members were ineligible. The foundation would consider academic achievement, character, hardship, financial need, and potential for future success, with renewable awards for students who maintained eligibility at a four-year institution. The IRS approved the objective and nondiscriminatory award procedures under section 4945(g)(1), subject to the foundation's proposed reporting, monitoring, recovery, and recordkeeping safeguards. Grants made under the approved procedures would not be taxable expenditures, and recipients could exclude qualifying tuition and related expenses under section 117.

Ruling snapshot

• Question: Do the foundation's proposed scholarship procedures satisfy the advance-approval requirements of section 4945(g)?
• Outcome: approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g)

Full text (IRS public release)

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

Release Number:202014021
Release Date: 4/3/2020 Employer Identification Number:

Date: January 9, 2020
Contact person - ID number:

Contact telephone number:

LEGEND UIL

B = Name 4945.04-04
x = Number

y = Number

Dear

You asked for advance approval of your scholarship grant procedures under
Internal Revenue Code (IRC) 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 IRC 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 IRC Section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program. The purpose of your
program is to provide scholarships to individuals for study at a four-year college or
university described in IRC Section 170(b)(1)(A)(ii).

Your scholarship is available to all high school seniors and community college
transferees whose permanent residence is located within B County and who participate in
a college access/readiness program you approve of. Applicants must have graduated
from an accredited high school with a minimum grade point average (G.P.A.) of 3.0 on a
4.0 scale. Relatives of members of the selection committee, or of your officers, directors
or substantial contributors are not eligible for scholarships under your program.

Letter 4792 (10-2012)
Catalog Number 58263T

You will consider the following factors as a part of your selection procedures:

• academic achievement (G.P.A., class rank, test scores);

• personal character (disciplinary actions, criminal history, recommendations);
• hardships (responsibilities, commitments, adversity);

• financial need (family status, eligibility for government financial aid); and
• potential for future success (college major, ambitions and goals, strategies for
transitioning to college).

When determining financial need, you will consider family factors such as dependents,
marital status, and parentage.

You intend to award up to x scholarships per year, subject to change, but will initially
award approximately y scholarships per year. The amount of the grant will be determined
by your selection committee, which is composed of your staff members. Scholarships will
be renewed if the recipient continues to attend a four-year college or university and
maintains a 3.0 G.P.A.

You plan to widely disseminate information on your program to maximize the number of
applicants. You may publicize your scholarship by creating an information page on your
website, advertising on social media, submitting scholarship information to online
databases, or directly distributing information to colleges and universities.

You represented that you will:

• arrange to receive and review grantee reports annually and upon completion of the
purpose for which the grant was awarded;

• investigate diversions of funds from their intended purposes; and
• take all reasonable and appropriate stops to recover diverted funds, ensure other
grant funds held by a grantee are used for their intended purposes, and 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 also represented that you will maintain all records relating to individual grants,
including information obtained to evaluate grantees, identify whether a grantee is a
disqualified person, establish the amount and purpose of each grant, and establish that
you undertook the supervision and investigation of grants.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(IRC 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 Section 4945(g) is not a taxable expenditure.

• The foundation awards the grant on an objective and nondiscriminatory basis.

Letter 4792 (10-2012)
Catalog Number 58263T

• The IRS approves in advance the procedure for awarding the grant.

• The grant is a scholarship or fellowship subject to the provisions of IRC Section
117(a).

• The grant is to be used for study at an educational organization described in IRC
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 IRC 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.

Letter 4792 (10-2012)
Catalog Number 58263T

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T