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Sunday March 7, 2021Private Letter RulingFoundation's Scholarships Not Taxable
GiftLaw Note:
Foundation requests advance approval of its scholarship procedure under Sec. 4945(g). Foundation will operate programs C and D. The purpose of C is to award scholarships to high school students to attend courses at a community college, university or trade school. The purpose of D is to make grants to families with children who would not be able to afford early learning programs to participate in these programs. C and D will be publicized by Foundation in schools, early learning centers, referrals, literature and information sessions. The amount of the awards will be based on a percentage of the cost of the particular program. Upon completion of the application and interview process, scholarship recipients will be selected by a committee composed of community individuals. Scholarship amounts will be paid directly to the educational institutions. Foundation will review annual reports of the grantees and ensure funds held by grantees are used for their intended purposes. Expenditures from private foundations to individuals for travel, study or other similar purposes are generally taxable expenditures. However, Sec. 4945(g) provides an exception for grants that meet certain requirements. Under Sec. 4945(g), a grant will not be considered a taxable expenditure if the foundation awards the grant on an objective and nondiscriminatory basis, the IRS approves the grant procedure in advance, the grant is a scholarship or fellowship subject to Sec. 117(a) and the grant is to be used for study at an educational organization described in Sec. 170(b)(1)(A)(ii). Heare, the Service determined that Foundation's procedures for awarding scholarships and grants meet the requirements of Sec. 4945(g). As such, the scholarships and grants will not be considered taxable expenditures.
PLR 202108011 Foundation's Scholarships Not Taxable
02/26/2021 (12/2/2020) 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 determinationWe 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 requestYour letter indicates you will operate a grantmaking program. Under your program, you will award scholarships called C and D. The purpose of C is to award grants to high school students to pursue higher education at a community college, university or trade school. The purpose of D is to award scholarships for children to attend early learning educational programs/preschools whose families would otherwise not be able to afford these programs and/or have not received other state base assistance. Both C and D will be publicized in the respective schools or early learning centers through word-of-mouth, peer to peer referrals, literature, and information sessions put on by you. Typically, dollar amounts for C and D will be determined based on a percentage of the cost of the particular educational program of the recipient and will normally be in the range of x dollars. Furthermore, you will annually determine the number of awards for both C and D based on a percentage of your cash budget. Recipients of both C and D will be chosen by a selection committee whose members will be appointed by you. Generally, the members will be community individuals who understand the importance of your work and have had experience in managing and interviewing people. If you need to replace a committee member, you will seek qualified individuals from local community organizations. Specifics of CTo be eligible for C, the student must:
Specifics of DTo be eligible for D, families of a preschool age child must:
All application packages will be reviewed by the selection committee to ensure that the applicant family has demonstrated financial need as well as to determine if the applicant family is employed and even with employment is in need of "gap coverage" to ensure that the preschool aged child is able to attend a quality childhood learning facility. Furthermore, applicants will be rendered ineligible for scholarship consideration if they have received other state-based aid. These are one-time grants, but families may reapply for subsequent years and must substantiate they are meeting the requirements of the grant. The early learning centers will also be providing you with regular progress reports. Procedures for both C and DYou will pay all scholarships directly to the educational institution on behalf of the recipient. The educational institution is then responsible for providing you documentation noting that the funds were used on the behalf of the recipient for qualified educational expenses. 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, (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: (1) maintain 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
Internal Revenue Service Exempt Organizations Determinations P.O. Box 2508 Cincinnati, OH 45201 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 March 5, 2021
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