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Tuesday April 24, 2018Private Letter RulingScholarship Grants Not Taxable
GiftLaw Note:
A private foundation ("Foundation") requested approval of three scholarship programs and one supplemental educational grant. Through Program A, participating private schools nominate elementary or high school students for scholarship consideration. Eligibility requirements are financial need, residence in a low socio-economic neighborhood, personal motivation and academic potential. Awards are based on financial need, test scores and teacher or community recommendations. Program B is available to students enrolled full-time at a four-year college or university. Scholarships are awarded based on academic achievements, financial need, leadership ability, potential to impact the world, approach to academic, social and spiritual education and recommendations from teachers and community members. A supplemental grant is available for Program B recipients with unpaid or under-paid summer internships. Program C provides scholarships to students in a vocational or educational certificate program. Awards are granted to students based on charitable organization nomination, financial need, personal motivation and a desire to improve their lives. Foundation will consider those with a criminal history, previous addictions and similarly situated individuals looking to make a positive life change. Expenditures from private foundations to individuals for travel, study or other similar purposes are generally taxable expenditures. Section 4945(g) of the Code provides an exception for grants which meet the following requirements. First, the award must be made on an objective, nondiscriminatory basis. Second, the foundation must seek advance approval from the IRS of the grant program. Third, the grant must be (1) a scholarship or fellowship grant subject to Sec. 117(a) and used for study at an educational organization described in Sec. 170(b)(1)(A)(ii); (2) a prize or award subject to Sec. 74(b) if the recipient is selected from the general public; or (3) to achieve a specific objective, produce a report or improve or enhance literary, artistic, musical, scientific, teaching or other similar skill of the recipient. Here, the Service approved Foundation's grant program, finding that the three scholarship procedures and the internship grant would meet the requirements described in Sec. 4945(g)(3). As such, the educational grants will not be considered taxable expenditures.
PLR 201734011 Scholarship Awards Not Taxable
8/25/2017 (06/01/2017) Dear * * *: You asked for advance approval of your scholarship and educational grant procedures under Internal Revenue Code section 4945(g)(1) and 4945(g)(3). This approval is required because you are a private foundation that is exempt from federal income tax. Our determinationWe approved your procedures for awarding scholarships and educational grants. Based on the information you submitted, and assuming you will conduct your program as proposed, we determined that your procedures for awarding scholarships and educational grants meet the requirements of Code section 4945(g)(1) and 4945(g)(3). 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 request4945(g)(1) Scholarship Programs Your letter indicates you will operate three scholarship programs. The first program is called B. The purpose of B is to provide grants to individuals in elementary and high school from low socio economic households in the city of C. To be eligible for consideration the applicant must meet the following minimum criteria:
You also indicated you will operate a scholarship program called D. The purpose of D is to provide financial assistance to students enrolled in a four-year degree-granting college or university. Potential recipients will submit an application found at your website along with school transcripts, ACT/SAT test scores, a resume, biography and written statement. To be eligible for consideration the applicant must meet the following minimum criteria:
You will also operate a third scholarship program called E. The purpose of E is to provide scholarships to individuals enrolled in vocational schools or educational certification programs. The program is for non-traditional students such as ex-offenders, previous drug or alcohol addicts or others looking to have a serious and positive life. To be eligible for the scholarship applicants must have:
Your letter indicates that you will operate an educational grant program that supplements your program called D, described above. The purpose of this program is to provide individuals already receiving the D scholarship a monetary supplement for basic living expenses while the recipient is working an internship. The grants are intended to foster and enhance the recipient's leadership skills, confidence, judgement, problem solving skills, etiquette and professional development while at the internship. Potential recipients will submit an application found at your website. To be eligible for consideration the applicant must meet the following minimum criteria:
Each grant will be will approximately n dollars per person per year. Grants will be renewed unless the recipient drops out of school, has low academic performance, is suspended or engaged in illegal activity. In addition, the recipient must submit a written narrative progress report, transcripts and confirmation there has been no significant change in their financial situation. Children or relatives of your officers, directors, substantial contributors or selection committee members are not eligible for your scholarships or supplemental awards. For all of your programs, you represent 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, and (3) take all reasonable and appropriate steps to recover the diverted funds, ensure other grant funds held by a grantee are used for their intended purposes, and (4) 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 the following: (1) all records relating to individual grants including information obtained to evaluate grantees, (2) identify whether a grantee is a disqualified person, (3) establish the amount and purposes of each grant, and (4) establish that you undertook the supervision and investigation of grants described above. Basis for our determinationThe 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.
Other conditions that apply to this determination
Exempt Organizations Determinations P.O. Box 2508 Cincinnati, OH 45201
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 Published September 1, 2017
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