Three Scholarship Exception Rulings

February 20, 2012

Summary

In three unrelated rulings, numbered consecutively PLRs 201207010 through 201207012, the Service determined grants by a private foundation to individuals would not be treated as taxable expenditures.

Extended Summary

1. PLR 201207010

The foundation proposed to make grants to individuals to enable them to develop a sufficient understanding of a particular social or spiritual movement, not identified in the redacted text. The intent was to enable the grant recipients to "launch one or more dialogues in their communities," moderating forums in which the principles of the movement were taught and discussed.

The foundation would solicit applications through a network of participants involved in the "movement." Candidates would be selected by a panel comprised of representatives of the foundation and two public charities also associated with the movement. Grant monies were to be applied to creating and moderating local forums.

2. PLR 201207011

The foundation proposed to provide scholarships to students in a particular disadvantaged community within a foreign country to pursue education beyond the sixth grade. Students at an identified school in the community and members of the households of employees of that school would be eligible.

Specific grants might also include a stipend to the student's family to compensate for the loss of income resulting from the student's continuing to attend school rather than working.

The method of publicizing the scholarship program is not stated in the ruling. Candidates would be selected by the board of trustees of a public charity whose relationship to the foundation is also not stated. Apart from stipends to families, grant monies would be paid directly to the educational institution. The foundation expressly committed to comply with Office of Foreign Assets Control ("OFAC") procedures for distributions to foreign recipients.

3. PLR 201207012

The foundation proposed to provide scholarships to students in a foreign country to pursue post-secondary education, based on a combination of academic merit and financial need. The college or technical school the grant recipients would attend did not have to be located within the country.

Applications would be solicited through the foundation's website, and candidates would be selected by the foundation's board of trustees. Grant monies would be paid directly to the educational institution. Again, the foundation expressly committed to comply with OFAC procedures for distributions to foreign recipients.

In each of these cases, the Service found:

the proposed grant procedure included an objective and non-discriminatory selection process;
the proposed procedure was reasonably calculated to result in performance by the grantees of the activities the grants were intended to finance; and
the foundation intended to obtain reports confirming that the grantees had performed the intended activities.

Since the proposed program met these regulatory requirements, distributions would not be treated as taxable expenditures by the foundation. Except in the case of PLR 201207010, the Service also determined the proposed grants would be excludible from the recipients' gross income "subject to the limitations provided by Section 117."

As is typical in these cases, an express condition of each ruling was that "no grants will be awarded to foundation managers, or members of the selection committee, or for a purpose inconsistent with [the organization's exempt status]."

CPC Commentary

A private foundation intending to issue grants to private individuals must seek prior approval from the Service. There are dozens of these "scholarship exception" rulings requested and granted every year.

For the most part, these rulings are routine, reciting sufficient factual details to support the Service's determination that the proposed grant program meets the regulatory criteria mentioned above. In our brief summaries, we generally sketch only those key details, except where the facts of the ruling seem at odds with the findings, or in the unusual case where the request for approval of a proposed program is rejected.

It is particularly interesting to note in PLR 201207011 that a stipend could be paid to the student's family to compensate for the loss of income resulting from the student's continuing to attend school rather than working. This seems reasonable, but is surely unusual.