IRS approves a foundation's need-based scholarship procedures

Plain-English summary

A private foundation operated a scholarship program for study at U.S. educational institutions, with funds available for tuition, books, supplies, and room and board. Applicants had to provide transcripts, financial information, and a recommendation. A committee of board members would make objective selections based on factors including financial need, academic record, motivation, character, proposed study, instructor recommendations, and a stated interest in memorizing scripture. Recipients had to sign grant terms, submit verified periodic and final reports, and reapply rather than receive automatic renewals, while the foundation would investigate misuse and recover diverted funds. The IRS approved the procedures under section 4945(g)(1), so grants under the program would not be taxable expenditures, and amounts used for qualified tuition and related expenses could be tax-free to recipients under section 117(b).

Ruling snapshot

• Question: Did the foundation's scholarship selection, reporting, and oversight procedures qualify for advance approval?
• Outcome: approved (scholarships made under the procedures would not be taxable expenditures)
• Key authorities: IRC §§ 117, 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

Number: 202026004
Release Date: 6/26/2020
                                                Employer Identification Number:
Date: April 2, 2020
                                                Contact person - ID number:

                                                Contact telephone number:




LEGEND                                          UIL: 4945.04-04

W = Number
x dollars = Amount

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 provided in Code Section 117(b)).

Description of your request
You are operating a grant program. The purpose of the program is to provide
scholarships to be used for study at an educational institution described in IRC Section
170(b)(1)(A)(ii) in the United States to cover the payment of tuition, books and supplies,
and room and board.

You will promote the program by word-of-mouth from board members, individuals
interested in your mission and by other scholarship recipients as well as on your website.




                                                                     Letter 4792 (10-2012)
                                                                     Catalog Number 58263T
                                               2


At this time, you anticipate awarding in the range of W scholarships each year in the
range of x dollars. Moreover, the amount of each scholarship will be limited to the amount
of funds you have available for scholarships and the financial need of the recipient.

To be considered for a scholarship, the student must provide your completed application
form with the following:

   •   A certified college and/or certified high school transcript depending on the
       circumstances;
   •   Their tax returns and/or financial statements and if needed, those of their parents;
   •   At least one letter of recommendation.

Recipients will be selected by a selection committee consisting of your board members
on an objective and nondiscriminatory basis. Information the selection committee will use
to evaluate and select recipients includes financial need, prior academic performance,
performance on scholastic aptitude tests, desire and motivation, character, area of
proposed study, recommendations from instructors, and history of/or desire to memorize
scripture. Personal interviews may also be conducted.

Once notified, each recipient must sign an acceptance letter to agree to comply with the
terms of the grant and the reporting requirements. When possible, grant funds will be
paid directly to their educational institution. For each academic period, each recipient is
required to submit a periodic report which must contain their progress as to courses
taken and grades received. In addition, the report must be verified by the educational
institution. You will also require a final report, verified by the educational institution upon
completion of each recipient’s study.

All periodic reports from recipients will be reviewed by a designated officer within one
month of their submission. If such reports or any other information indicates that the
funds were not used in furtherance of educational purposes, you will investigate and to
the extent such investigation reveals evidence of improper use of the funds, you will take
steps to recover any such diverted funds. Additional funds will not be granted to a
recipient during a period in which an investigation is in process. Additionally, if an
improper use of funds is discovered, the recipient will no longer be eligible to receive
grant funds.

You will keep complete records relating to all scholarships including information obtained
to evaluate the qualifications of the recipients, identification of those selected and the
amount and purpose of each grant. All reports from the recipients and any other follow-up
data obtained in administering the grant program will be retained by you.

The scholarships will not be automatically renewed. Rather, a student who would
like to receive another scholarship will have to reapply.

Basis for our determination



                                                                         Letter 4792 (10-2012)
                                                                         Catalog Number 58263T
                                              3


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.

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
4


    Sincerely,



    Stephen A. Martin
    Director, Exempt Organizations
    Rulings and Agreements




                       Letter 4792 (10-2012)
                       Catalog Number 58263T