Domestic and international scholarship procedures approved

Plain-English summary

A private foundation proposed two need-based scholarship programs for low-income high school seniors. One would support students connected with a specified church, while the other would support students from other countries who had or could obtain lawful U.S. immigration status. Awards could cover tuition and other qualified costs, plus certain living, transportation, and travel expenses. Applicants would submit academic, financial, recommendation, and essay materials, and recipients seeking renewal would have to reapply, maintain academic standards, and continue demonstrating need. The foundation also agreed to monitor spending, investigate diversions, recover misused funds, keep detailed records, and comply with applicable economic sanctions. The IRS approved the procedures under sections 4945(g)(1) and 4945(g)(3), so complying grants would not be taxable expenditures.

Ruling snapshot

• Question: Do the foundation's domestic and international scholarship procedures satisfy sections 4945(g)(1) and 4945(g)(3)?
• Outcome: approved
• Key authorities: IRC §§ 74(b), 117, 170(b)(1)(A)(ii), 4945(g)(1), 4945(g)(3); Treas. Reg. § 53.4945-4(c)(1)

Full text (IRS public release)

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

Number: 202015030
Release Date: 4/10/2020

Employer Identification Number:
Date: January 13, 2020

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
X= Name

Y= Name

Z= Church

b dollars =
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 and educational grants.
Based on the information you submitted, and assuming you will conduct your
program as proposed, we determined that your procedures for awarding
scholarships and educational grants meet the requirements of Code Sections
4945(g)(1) and 4945(g)(3). As a result, expenditures you make under these
procedures won't be taxable.

Also, Section 4945(g)(1) 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.

Your purpose is to support programs for education, health, and medical needs of youth
and young adults involved in religious organizations.

The purpose of your program is to award scholarships to deserving low-income high
school seniors. Under your program, you will award scholarships called X and Y.

The purpose of X is to provide grants to enable qualified students to further their
education at a four-year accredited university in the U.S who for financial reasons might
be otherwise unable to attend a four-year university. X is available to:

• Members of Z;

• Children of Z’s members;

• Participants in Z's youth camps or other religious activities;

• Children of missionaries supported by Z;

• Children of missionaries supported by members of Z’s congregation.

The purpose of Y is to provide grants to students from other countries who either are
here with lawful immigration status or can gain lawful immigration status in the United
States in order for them to further their education at a four-year accredited university in
the U.S.

Under X and Y, you may make distributions which have components of both IRC
Sections 4945(g)(1) and 4945(g)(3). Examples of distributions under Section 4945(g)(1)
are scholarships for recipients to attend a qualified educational institution to pursue a
formal course of study. Examples of distributions under Section 4945(g)(3) are living
expenses, transportation expenses, and travel expenses. Travel expenses would be paid
if a scholarship recipient’s residence is in another state or country in order for the
recipient to travel from their home residence to the educational institution. In addition,
your current plan is to award one X scholarship and one Y scholarship each in the range
of b dollars until resources allow you to increase the number of scholarships. This plan is
also dependent on the number of applications received and the demonstrated financial
need of the applicants.

X will be advertised through all appropriate programs of Z while Y will be advertised
through public and private high schools in the local area. In addition, there will be
materials including the application forms for both programs available on the internet.

All applicants for X and Y must provide a completed application form along with the
following:

1. An up to date official transcript from Grade 10 through the first term of Grade 12;

2. A copy of their FAFSA, and any other financial information that will assist in
determining financial need;

3. Letters of recommendation from individuals who know the student well. These
letters must be submitted in sealed envelopes and the student must waive any right to
see them;

4. An essay about themselves, their plans, and how this scholarship will affect those
plans;

5. A description of the sources and amounts of all other awards and scholarships
they have received. In addition, they should name the schools they are considering
attending and the reasons why they are considering these particular schools.

All applications for both X and Y will be reviewed for completeness by your scholarship
committee consisting of your president and one other board member. The scholarship
committee will then evaluate and rank complete applications to select finalists based on
but not limited to the following criteria:

• Academic achievement(s);

• Financial need;

• Involvement in extra-curricular activities;

• Appropriate faculty and non-faculty recommendations;

• Expectations for success in a university setting.

Moreover, applicants with a GPA under 3.0 or who cannot demonstrate significant
financial need are unlikely to be selected unless there are unusual or extenuating
circumstances.

Concerning payment, you will usually pay both X and Y directly to the educational
institution for qualified expenses. In some cases, the Y recipient may be provided funding
to live off-campus not to exceed the fair market value of room and board available on the
open market in the area within a five-mile radius of the educational institution. You will
also consider providing funds for students to commute to and from their off-campus
housing to the educational institution. This may take the form of a monthly transportation
allowance to provide for the use of public transit in the area of the educational institution.
Furthermore, you will directly pay travel expenses directly to the recipient. In all cases
where you provide funding directly to the recipient, the recipient will be required to
provide you with receipts and other documentation for verification. If proper
documentation is not provided upon request, you will investigate and take all reasonable
and appropriate steps to learn how the funds were used or recover any funds diverted to
improper uses.

The scholarships may be renewable for up to three years, depending upon academic
performance and need of the recipients. The recipients must complete a new application
each year, provide transcripts and maintain a 2.5 GPA or the equivalent.

In addition, any student who ceases to be enrolled or does not maintain a satisfactory
record of academic achievement, will also cease to be eligible to receive scholarship
funds. Furthermore, if a student’s economic status changes and they are no longer able
to demonstrate financial need, then they will no longer qualify for scholarship 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, (3) take all
reasonable and appropriate steps to recover the diverted funds, ensure other grant funds
held by the 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 represent that you will maintain all records related to the following: (1) individual
grants including information to evaluate grantees, (2) grantees which 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.

You will check the OFAC List of Specially Designated Nationals and Blocked Persons for
names of individuals and entities with whom you are dealing to determine if they are
included on the list. You will comply with all statutes, executive orders, and regulations
that restrict or prohibit persons from engaging in transactions and dealings with
designated countries, entities, or individuals, or otherwise engaging in activities in
violation of economic sanctions administered by OFAC. If necessary, you will acquire
from OFAC the appropriate license and registration.

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 Section 117(a) and is to be used for
study at an educational organization described in Section 170(b)(1)(A)(ii); or

- A prize or award subject to the provisions of Section 74(b), if the recipient of
the prize or award is selected from the general public; or

- To achieve a specific objective; produce a report or similar product; or
improve or enhance a literary, artistic, musical, scientific, teaching, or other
similar skill or talent of the recipient.

Under 4945(g)(3), to receive approval of its educational grant procedures, Treasury
Regulations Section 53.4945-4(c)(1) requires that a private foundation show:

• The grant procedure includes an objective and nondiscriminatory selection
process.

• The grant procedure results in the recipients performing the activities the grants
were intended to finance.

• The foundation plans to obtain reports to determine whether the recipients have
performed the activities that the grants were intended to finance.

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.

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