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What do we need for our scholarship fund?

Your Legal Questions Answered

What do we need for our scholarship fund?

Our small nonprofit started a committee to award two $1000 scholarships. One of the awards was funded by a married couple who sit with me on the scholarship committee. Our president said they can not be involved in the final decision-making due to “legalities.” The couple has been involved with two other scholarship programs and say they have every right to make the decision where their money goes. Are they correct?  Because this is our first year, we have chosen a small applicant pool at just one school where we have asked the college counselor for nominees.  Our president says we need to get letters from both the principal and the superintendent of the school board. What documentation and approval do we actually need?

I assume that your organization is a public charity and not a private foundation, because if it is a private foundation you have to get your scholarship procedures approved in advance by the Internal Revenue Service.  You will probably want to use the non-discrimination rules established for private foundations as the basis for your own procedures and qualifications, however.

If you have donors who expect to advise on the distribution of their contribution to you, you may have created a “donor advised fund,” which is prohibited by law from making grants to individuals. (See section 4966 of the Tax Code.)  But even if it could be a donor advised fund, the statute specifically excludes a scholarship fund from the donor advised fund rules so long as the advisers are only a minority of the committee making the final scholarship decisions.  Both your donors and your president are technically incorrect.  The donors don’t have a right to make the ultimate decision themselves, but they have a legal right to be involved in the decision so long as they are only a minority of the final decision making group.

What kind of documentation you want from the school may be set by the school’s rules rather than your own.  You can accept recommendations from anyone you think will give you good advice, but the school may have rules that require recommendations cleared through a higher level of the administration.  You should consult with the school to see how it wants to handle the request.  You don’t want to make it more complicated than necessary, but you do want the willing cooperation of the school.

Tuesday, January 28, 2020

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