C.20. Grants Constituting Scholarship, Prize or Achieving a Specific Objective

(1) In addition to satisfying the Section 4945(g) requirements of objective and

nondiscriminatory basis and grant procedures approved in advance, a grant described in Section 4945(d)(3) must satisfy either of the following two requirements in order not to be a taxable expenditure.

a. It constitutes a scholarship, fellowship, prize, or award under Sections

4945(g)(1) or (2).

b. The purpose of the grant is to achieve a specific objective, produce a report

or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee.

(2) Scholarship or fellowship grants that would be subject to the provisions of Section

117(a) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) and are to be used for study at an educational organization

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described in Section 170(b)(1)(A)(ii), will not be taxable expenditures under Section 4945. See Section 4945(g)(1).

a. Prior to the Tax Reform Act of 1986, Section 117 scholarships excludible from

gross income included amounts for room, board, laundry service, and similar services or accommodations, and included payments to non-degree candidates as well as degree candidates. The Section 4945(g)(1) language “(as in effect on the day before the date of the enactment of the Tax Reform Act of 1986)” [Oct. 22, 1986] thus treats such amounts as permissible scholarship grants for purposes of Section 4945(g).

b. For this purpose, an educational organization includes a for-profit school that

meets the requirements of Section 170(b)(1)(A)(ii), even though it cannot receive tax-deductible contributions.

(3) If a Section 4945(d)(3) grant does not constitute either a scholarship, fellowship

or prize, it may still satisfy Section 4945(g)(3) as a grant made for a "specific objective." Two revenue rulings highlight this requirement in the context of grants or loans for education.

a. In Rev. Rul. 77-44, 1977-1 C.B. 355, a private foundation made scholarship

grants to students who planned to teach in the public schools. However, the private foundation did not require such future services for the students to receive the scholarship grants. The grants were made on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the IRS. Since the grants were awarded to recipients who pledged (though not obligated) to render future services, the scholarship grants were not Section 117(a) scholarships described in Section 4945(g)(1) and were not excluded from classification as taxable expenditures. However, since the grants were made to attract students to be public school teachers as well as to improve the recipients’ teaching skills, they were made for the specific objective of improving public education and for the improvement of the recipients’ teaching skills. Thus, the scholarship grants qualified as grants under Section 4945(g)(3) and were not taxable expenditures. See also Beneficial Foundation v. United States, 8 Cl.Ct. 639 (1985).

b. In Rev. Rul. 77-434, 1977-2 C.B. 420, a private foundation made long-term,

low-interest educational loans to students. The recipients were required to use the loans at a specific educational institution described in Section 170(b)(1)(A)(ii). Although the loans were not scholarships or prizes, the educational loans were made to further the education of the recipients and were narrow and definite to ensure the use of the loans for Section 501(c)(3) purposes. Thus, the educational loans qualified as grants described in Section 4945(g)(3). See also Treas. Reg. 53.4944-3(b), Example (9) (interestfree educational loan is program-related investment); loans for charitable purposes and other program-related investments are treated as grants under Treas. Reg. 53.4945-4(a)(2).