Foundation's last-dollar scholarship procedures approved

Plain-English summary

A private foundation proposed need-based, last-dollar scholarships for recent high school graduates from a particular community. Awards would cover the gap between estimated education costs and other financial aid. A board committee would select recipients using objective criteria, the foundation would pay schools directly, and renewals would depend on academic progress and enrollment. The IRS approved the procedures under Section 4945(g)(1), so compliant grants will not be taxable expenditures. Awards used for qualified tuition and related expenses also will not be taxable to recipients, subject to Section 117(b).

Ruling snapshot

• Question: Do the foundation's procedures for awarding community-based education scholarships satisfy the advance-approval rules?
• Outcome: Approved. Grants made under the described procedures will not be taxable expenditures.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)

Full text (IRS public release)

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

Number: 202114026
Release Date: 4/9/2021
Employer Identification Number:
Date: January 12, 2021
Contact person - ID number:

                                            Contact telephone number:

LEGEND UIL: 4945.04-04
C= City
D= Name

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

Your letter indicates you will operate a scholarship program.

The purpose of the scholarship program is to support young adults in the geographical
area of C in order to provide them necessary funding in obtaining an optimal education.
Another goal of the scholarship is to make student loans for the recipient unnecessary, so
the student may graduate and begin their career without any financial burden associated
with the cost of education. To promote the scholarship program, you will rely on word of

                                                                Letter 4792 (10-2012)
                                                                Catalog Number 58263T

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mouth through individuals familiar with you and C, who will refer students they believe
merit consideration.

Under your scholarship program, you will provide need-based scholarships to recent high
school graduates in or around C, who are seeking postsecondary education generally for
pursuing an Associate’s or Baccalaureate degree, but you may consider awarding
scholarships to students pursuing post-Baccalaureate education in certain
circumstances.

Additionally, your scholarships are characterized as “last dollar” scholarships.
Specifically, the amount awarded per recipient will be the ultimate difference between the
total estimated cost of the recipient’s education per year (including tuition, fees, books,
and, if applicable, room and board) and the total financial aid received from other
sources, including federal grants, state grants and other scholarships.

To be eligible for a scholarship, the student must have graduated from a high school in or
around C and begin within 24 months of graduation, or has already begun, attending a
postsecondary institution. You also expect all applicants to file a FAFSA form for the
applicable school year and apply for D if attending an in state educational institution.

To apply for a scholarship, the student must complete your application form, explain their
long terms educational and career goals, provide detailed information including a list of all
scholarships and other source financial aid.

All applications will be reviewed and evaluated by a selection committee composed of
your board of directors based on the following:

• Their description of a clearly defined, goal or plan for their future, which must be
meet by higher education;
• Their demonstrated commitment and motivation in achieving their goals;
• The establishment of a clear financial need;
• Their established and confirmed connection to the C community.

The selection committee will require the most qualified applicants participate in at least
one interview to determine the recipients. All scholarships will be awarded on an
objective and nondiscriminatory basis.

You will pay scholarship funds directly to the applicable educational institution as long as
the institution agrees to notify you if a student is no longer in good academic standing or
has dropped below 12 hours of enrollment.

To renew the scholarship for each year, the recipient must:

  • Generally, maintain a cumulative grade point average of 2.5 or higher;
  • Demonstrate consistent progress towards their educational goal;
  • Remain in good academic standing;

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• Maintain enrollment for at least 12 hours of coursework per semester, unless
agreed upon otherwise.
Students who may be in violation of the terms of the scholarship will be given a written
warning and provided academic or other support as appropriate. In the event that a
recipient is not succeeding and is not motivated to change after your intervention, you will
terminate the award.

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.

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:

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                               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.

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