Deep Dive - Scholarships 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 Non-discriminatory School restrictions (nonprofit & for-profit) Fields of study/careers Gender Ethnic Background Religion Community Service Citizenship

Selection Committees 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 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 Multi-year scholarships (renewals) Reapplications Changing procedure mid-stream Pre-selection problems

Membership Organizations and Clubs 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 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 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 – 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

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?