IRS approves renewable scholarships for seniors at two local high schools

Plain-English summary

A private foundation proposed annual scholarships for graduating seniors at
two local high schools. School staff would screen applications for academics,
activities, community service, and financial need, after which a foundation
committee would interview finalists and make selections. Financial need would
receive heavy weight alongside grades, volunteer work, recommendations,
essays, and interviews. The scholarships could be renewed for up to four years
if recipients maintain a minimum grade point average. The foundation also
described annual reporting, monitoring, diversion-recovery, and recordkeeping
procedures. The IRS approved the selection procedures under IRC
§ 4945(g)(1), so grants made under them will not be taxable expenditures.

Ruling snapshot

• Question: Do the proposed scholarship selection and supervision
  procedures satisfy the advance-approval rules of § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g),
  and 509(a)(1)

Full text (IRS public release)

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

Number: 202046011

Release Date: 11/13/2020
Employer Identification Number:

Date: August 18, 2020
Contact person - ID number:

Contact telephone number:

LEGEND
B = Local High School #1
C = Local High School #2
D = City, State
x dollars = $

UIL: 4945.04-04
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 to award scholarships
annually to high school seniors at B and C located in D. All scholarships will be made for
courses of study at accredited colleges and universities that qualify under IRC Sections

509(a)(1) and 170(b)(1)(A)(ii).

You represent that you will award approximately four scholarships worth up to x dollars
each, depending on your available funding and the demonstrated financial need of

applicants.

Letter 4792 (10-2012)
Catalog Number 58263T

You state that your scholarships are advertised through the guidance offices at both high
schools. Any student may apply for your scholarships by submitting a completed
application form to the guidance office. The application form requests information on the
applicant’s college admissions status, career plans and future aspirations, anticipated
college expenses, financial need, school and community activities, work experience,
family composition, and any special circumstances that the applicant wishes to disclose
for consideration during the selection process.

The schools’ faculty members and guidance offices are responsible for pre-screening
these applications and transcripts for scholarship eligibility using the following criteria:
academic performance, extracurricular activities, community service, and financial need.
Guidance offices then forward eligible students’ applications and transcripts to your
selection committee, which consists of at least three members of your board of directors.

Your selection committee further screen applications and then conduct personal
interviews of no more than six students per school. Final selections are based on
financial need, grade point average, extracurricular activities, volunteer work, community
involvement, faculty recommendations, essays, and personal interviews. Financial need
is heavily weighted and determined by applicants’ responses to your scholarship form.

Scholarships are renewable for up to four years if students maintain a minimum grade
point average. Scholarships are paid to the scholarship fund at each high school and
disbursed directly to recipients or recipients’ colleges or universities. Your scholarship
committee will monitor and report recipients’ academic performances for scholarship
renewal decisions.

You represent that you will arrange to receive and review annual reports on your
scholarship recipients. Upon completion of the purpose for which the scholarship was
awarded, you will also investigate diversions of funds from their intended purposes and
take all reasonable and appropriate steps to recover diverted funds. Additionally, you will
ensure other scholarship funds held by recipients are used for their intended purposes
and withhold further payments until you obtain reasonable assurances that future
diversions will not occur and that recipients will take extraordinary precautions to prevent
future diversions.

You represent that relatives of the members of the selection committees, as well as your
officers, directors, and substantial contributions are not eligible for your scholarships. You
will maintain case records for your recipients that include their names, addresses, the
purposes for the scholarships, the amounts of the scholarships, the manner in which
recipients were selected, and the relationships (if any) to your officers, directors, and/or
substantial donors.

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

Letter 4792 (10-2012)
Catalog Number 58263T

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 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 representatives as indicated in your power of
attorney.

Letter 4792 (10-2012)
Catalog Number 58263T

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

cc:

Letter 4792 (10-2012)
Catalog Number 58263T