Taxing Lessons From Court Decisions

Decisions — Taxing Scholarship

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Image source: By Traced and reworked by User:Stannered [Public domain], via Wikimedia Commons
Image source: By Traced and reworked by User:Stannered [Public domain], via Wikimedia Commons

The adage that charity begins at home may explain the strict rules for private foundations. Because these charitable organizations are generally under the control of a single individual or family, the resources of a private foundation are susceptible to being diverted to private purposes, rather than charitable ones. To help prevent abuses, private foundations are subject to excise taxes, including one on taxable expenditures (internal revenue code section 4945).

Under section 4945, a taxable expenditure is defined as any amount paid or incurred by a private foundation as a grant to an individual for travel, study, or other similar purposes, unless the grant meets certain requirements.

Specifically, those requirements are:

— 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 as described in the internal revenue code.
— The grant is to be used for study at an educational organization described in the internal revenue code.

If the grant meets the requirements, the expenditures are not taxable, and the grant is not taxable to the recipients when used for qualified tuition and related expenses.

In Private Letter Ruling 201619012, a private foundation requested advance approval of a scholarship program. The foundation wanted to establish the scholarship as a memorial to an individual in recognition of that individual’s contributions to electrical engineering.

The scholarship would be nonrenewable and awarded annually for one year of full-time graduate work in electrical engineering at an engineering school of recognized standing located in the U.S.

The recipient student would have to be a permanent resident of the U.S., have majored in the field of electrical engineering, and have received a bachelor’s degree from an engineering college of recognized standing. The scholarship would only be awarded to a full-time first-year graduate student.

A student’s application for the scholarship would have to include transcripts and letters of recommendation. The scholarship committee would be seeking applicants with the ability to perform graduate level work who exhibited originality and creativity, character, diligence, social responsibility, and ability to lead and communicate. In addition, the scholarship committee would consider work history, personal statements from applicants about future plans for a career in electrical engineering, and the applicant’s aptitude for engineering.

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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire case.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Based on the information submitted, and assuming the program will be conducted as proposed, the procedures for awarding scholarships meet the requirements of internal revenue code section 4945(g)(1). As a result, expenditures made under these procedures won’t be taxable.

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