Tuesday, April 23, 2024
GiftLaw Pro
GiftLaw Note: Private foundations may award scholarships, but they are subject to specific requirements under Sec. 4945(b)(3) that include advance approval by the Service. The advance approval is designed to make certain that the grants are on an objective and nondiscriminatory basis. In addition, private foundations may not under the Sec. 4941 self-dealing rules make grants to family members for educational purposes.

In this ruling, a private foundation proposes to make grants to a public supported charity. The public charity will independently evaluate scholarship applicants. All scholarships will be awarded based upon academic merit and the potential of the student. If scholarships exceed tuition and fees, then under Sec. 117, these students will be notified that the excess is taxable income.

Since no scholarships will be awarded to the foundation managers or trustees and the public charity will award scholarships based upon merit, the proposed plan is approved by the Service.

Editor's Note: Given the large number of smaller private foundations that desire to assist students, it is eminently logical for more of these private-public charity relationships to be created. The private foundation achieves its exempt goal, while benefiting from the lower cost of administration and operation of the scholarship program by the public charity.

Date: October 12, 2000

This is in reference to your letter dated February 1, 2000, requesting advance approval of your grant procedures under section 4945(g)(1) of the Internal Revenue Code.

The information submitted in this case shows that grants will be administered and supervised by A, a publicly supported charity. The scholarship program is called B. A will prepare and furnish application forms, receive all applications, determine the recipients and amount to be awarded, notify the recipient's [sic] of the award, confirm enrollment in an educational institution, make payment of the award, and supervise and investigate the use of the grant funds by recipients in their educational programs. Recipients are determined solely by A utilizing selection criteria based on an analysis of detailed information whereby each candidate is evaluated based on the following: scholastic aptitude as measured by performance on the scholastic aptitude test scholastic performance measured by rank in class; counselor appraisal[;] and interests, activities and leadership contributions.

Scholarships will only be awarded to students that plan to enroll in an institution that meets the requirements of section 170(c)(1)(A)(ii) of the Code. The recipient will not be restricted in his or her course of study. Since this program will not involve employment-related grants, Revenue Procedure 76-47, 1976-2 C.B. 670, is not applicable.

Section 4945(g) of the Code provides for the imposition of taxes on each taxable expenditure of a private foundation.

Section 4945(d)(3) of the Code provides that the term "taxable expenditure" means any amount paid or incurred by a private foundation as a grant to an individual for travel, study, or other similar purposes by such individual, unless such grant satisfies the requirements of section 4945(g).

Section 4945(g)(1) of the Code provides that section 4945(d)(3) shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the Secretary, if it is demonstrated to the satisfaction of the Secretary that the grant constitutes a scholarship or fellowship grant which is subject to the provisions of section 117(a) and is to be used for the study at an educational organization described in section 170(b)(1)(A)(vi) of the Code.

Based on the information presented above, and assuming the programs will be conducted as proposed, with a view to providing objectivity and nondiscrimination in the awarding of scholarship grants, we rule that your grants to A for the awarding of scholarships comply with the requirement of section 4945(g)(1) of the Code. Thus, such expenditures made in accordance with those procedures will not constitute "taxable expenditures" within the meaning of section 4945(g)(3) of the Code.

The recipient of the scholarship is responsible for determining whether all or part of the scholarship is includable in gross income under section 117 of the Code. We understand that A will advise the recipient that amounts granted are taxable income, if the aggregate scholarship amounts received by the recipient exceed tuition and fees (not including room and board) required for enrollment or attendance at the educational institution and fees, books, supplies, and equipment required for courses of instruction.

This ruling is based on the understanding that there will be no material change in the facts upon which is based, and that no grants will be awarded to foundation managers, trustees, members of selection committees, or for a purpose inconsistent with purpose described in section 170(c)(2)(B) of the Code. Any change in the procedure must be reported to the Ohio Tax Exempt and Government Entities (TE/GE) Customer Service office. The mailing address is: Internal Revenue Service, TE/GE Customer Service, P.O. Box 2508, Cincinnati, OH 45201.

Please note that this ruling is only applicable to grants awarded under the A scholarship program as outlined above. Before you enter into any other scholarship program, you should submit a request for advance approval of the program.

We are informing the Ohio Tax Exempt and Government Entities (TE/GE) Customer Service office of this action. Please keep a copy of this ruling with your organization's permanent records.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

If you have any questions about this ruling, please contact the person whose name and telephone number are shown in the heading of this letter.

Sincerely,
Robert C. Harper, Jr.
Manager, Exempt Organizations
Technical Branch 3

Related Topics On Private-Public Charity Cooperation on Scholarship Fund

7.2.3  Minimum and Qualifying Distributions:    Most private foundations do not conduct charitable activities but instead manage money and distribute it to other charities. To ensure that private foundation money does not remain in bank accounts unused, each year a private foundation is required to distribute at least 5% of its assets for charitable purposes. This is known as the "minimum distribution" requirement.


7.2.6  Taxable Expenditures:    Any money spent by a private foundation that is not consistent with the foundation's charitable purposes is called a "taxable expenditure." Taxable expenditures include any of the following: lobbying, most voter registration drives, grants to individuals (unless grantmaking procedures are approved), grants to any organization not classified as a public charity (unless expenditure responsibility is exercised; see GiftLaw Pro 7.2.4), and any other expenditure not in furtherance of the private foundation's exempt purposes.



© Copyright 1999-2024 Crescendo Interactive, Inc.