IRS approves a private foundation's college scholarship procedures

Plain-English summary

A private foundation proposed scholarships for graduating high school students from disadvantaged areas who showed financial need and strong academic performance. Awards would cover tuition and related educational expenses for up to four years, with a possible fifth year, and could be renewed while recipients maintained financial need and a specified grade-point average. A board-based selection committee would apply objective criteria, and current or former officers, donors, and immediate family members would be ineligible. The foundation also described procedures for monitoring enrollment and grades, investigating diverted funds, recovering misused amounts, and maintaining grant records. The IRS approved the procedures under § 4945(g)(1), so qualifying expenditures under the program would not be taxable expenditures, and amounts used for qualified tuition and related expenses would not be taxable to recipients subject to § 117(b).

Ruling snapshot

• Question: Did the foundation's proposed scholarship selection and supervision procedures qualify for advance approval under § 4945(g)(1)?
• Outcome: approved (scholarship expenditures made under the described procedures will 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: 202037011
Release Date: 9/11/2020
                                                        Employer Identification Number:
Date: June 16, 2020
                                                        Contact person - ID number:

                                                        Contact telephone number:




LEGEND                                                  UIL: 4945.04-04
B = City
c dollars = Amount
d dollars = Amount
e dollars = Amount
F = Number


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 that you will operate a scholarship program for students in B in order
to provide for tuition, enrollment fees, books, school uniforms, computer and other
supplies, travel and relocation expenses, and other expenses incident to the student’s
course of study. The scholarship will be awarded on an objective and non-discriminatory
basis.


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

The purpose of your program is to support youth from disadvantaged areas in B who face
challenges in pursuing a post-secondary education. You will focus on youth that are from
single-parent homes, are the first in their family to attend a post-secondary institution,
and/or who engage in community service.

To be eligible for a scholarship, the student must:
   • Demonstrate a financial need (based on family income)
   • Graduate from high school within the year the scholarship will be awarded, and
   • Demonstrate strong prior academic performance (maintain GPA of 3.0).

Applicants must also submit the following:
   • A complete application including student essay
   • Any references that are needed
   • Letters of recommendation
   • Proof of enrollment
   • Financial information, and
   • Any other documentation needed to determine initial and ongoing eligibility.

You intend to award scholarship grants of up to c dollars per academic year for tuition to
each individual recipient for up to four years. An additional fifth year will be considered on
an individual basis. Up to d dollars will be paid per semester to the institution where the
recipient is enrolled as a full-time student. Potential total value of the scholarship over the
four years would be e dollars. If the total annual tuition is less than c dollars, then the
annual scholarship amount will be equal to that lesser amount.

Up to F scholarships will be awarded annually with the goal that scholarships will be
renewed each year so long as the recipient demonstrates financial need and maintains a
2.5 GPA while enrolled at an accredited post-secondary institution.

Your scholarship program will be publicized by informing relevant college guidance
personnel in B area high schools and community organizations about the scholarship.
Your announcement will include a summary of the eligibility criteria, contact information,
and a statement that teachers, schools, or educators can recommend promising students
for the scholarship. A copy of the application will be disseminated to your partner schools,
school districts, and community organizations.

Your selection committee is composed of four members of your board of directors and
may also contain any other member that is chosen unanimously by your board. Changes
to membership will be made at your annual meeting, or as necessary, should vacancies
arise. Current and former officers, donors, and any immediate family members would be
considered ineligible recipients of the scholarship.

You will supervise the scholarships by compiling a record of recipients, starting with
records obtained through the application process. Recipients must sign a letter granting
you access to grade and enrollment records. Two consecutive semesters below a 2.5
GPA will result in the loss of scholarship. Recipient must provide the previous term grade

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

report and upcoming term’s enrollment schedule before the next term’s payment is made
to the educational institution. If the terms of the scholarship are violated, the scholarship
will be withdrawn.

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.

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

                                                                       Letter 4792 (10-2012)
                                                                       Catalog Number 58263T
                                              4



   •   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




                                                                       Letter 4792 (10-2012)
                                                                       Catalog Number 58263T