Deep Dive - Scholarships
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Legal Background and PPA
Reverse Scholarship Case Study
Fellowship Program Case Study
Q&A
Pension Protection Act 2006
Defined Donor Advised Funds
Added two new sections to IRC (4966 and 4967)
Prohibited grants from DAFs to individuals
Question:
How can a donor participate in making grants to
individuals?
Scholarship exception to DAF
Scholarship Exception IRC
4966(d)(2)(B)(ii)
• Donor advises grants to individuals for
study/travel or similar purposes
• Donor’s advisory privileges performed as part
of committee – all appointed by CF
• Donor and related parties cannot control
committee
• Objective and nondiscriminatory criteria
• Procedure approved in advance by board
A Word on Scholarship Guidance:
Most guidance we have from the IRS was
created for private foundations
Conservative advice = follow PF rules
Keep general principles in mind
Basic Components
Applicant Pools:
• Sufficiently large
• Indefinable
• Competitive process
• “Valedictorian” exception
Permissible Selection Criteria
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Non-discriminatory
School restrictions (nonprofit & for-profit)
Fields of study/careers
Gender
Ethnic Background
Religion
Community Service
Citizenship
Selection Committees
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Appointed by the Board
Delegation of Board duty
Donor participation (minority role)
Communication and oversight by CF
Scholarship vs. “Qualified
Scholarship”
• IRC Sec. 117 defines “qualified scholarship” =
tuition, fees, books, supplies and equipment
• Treas. Reg. 1.117-3 defines “scholarship”
• Many items acceptable to pay as “scholarship”
but some portion may be taxable to student –
“contributed services and accomodations”
Payment Issues
• Payment to school
• Payment to student
• Qualified tuition and related expenses are not
taxable (tuition, fees, books, supplies)
• Other payments may be taxable to student
• Not generally required to issue 1099
Reporting and Privacy
• Form 990 reporting (no need to identify)
• Do not disclose social security numbers
• Inform students of other reporting (annual
reports, publicity photos, etc.)
Renewals and Reapplications
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Multi-year scholarships (renewals)
Reapplications
Changing procedure mid-stream
Pre-selection problems
Membership Organizations and
Clubs
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Who is the donor?
What is the membership requirement/dues?
Is the intent to recruit members?
Resist temptation to “appoint” club as
committee
• Include CF staff on committees
Changing Criteria
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Avoid pre-selection
Number of awards
Amount of awards
Technical problems and correcting mistakes
Provisions to include in fund agreements
Checking in with donors
Employer-Related Scholarships
• Rev. Proc. 76-47 original guidance for private
corporate foundations
• For community foundations - rules to follow if
scholarship is limited to employees and their
family members
IRS Concerns – Noncharitable
Purpose
1. Unreported compensation paid to employees
2. Scholarship program as
recruitment/retention tool
3. Tax advantaged training for current and
future employees
Avoiding the Appearance of
Compensation to Employees
• Competitive process is required
• Per Rev. Proc. 76-47 – maximum 25% of all
eligible students who applied and were
considered by the selection committee or 10%
of qualified students whether or not
application submitted
• “Facts and circumstances” test if percentages
are not met
“Preference” vs Requirement
Number of IRS rulings have held that
“preference” for employees or family members
will require adherence to Rev. Proc. 76-47
A Note on Selection Criteria
• All other rules still apply
• Employment can be an initial qualifier but
continued employment cannot be required
• Subjective employment-related performance
criteria cannot be considered (performance
reviews, attendance, etc.)
Scenarios not covered?
Most creative scholarship problem?