Chapters or councils should use great caution if they choose to grant scholarships to individuals.
While 501(c)(3) organizations (TU, its chapters and councils) are permitted by the IRS to grant scholarships that further the charitable purpose of the organization, the IRS has strict and complex rules for governing the process of granting and reporting on scholarships. This is because giving a scholarship directly to an individual runs the risk of using tax-exempt dollars to benefit a specific individual. If your chapter or council would like to pursue giving scholarships to individuals where the chapter or council in question would be selecting those individuals itself, you must be aware of and comply with the following:
- Grants to individuals are not permitted unless there is a “charitable class” of potential recipients. This requires that the group of persons that can benefit must be either a large enough or an indefinite class, so that the assistance to the members of the class benefits the greater community. For example, giving scholarships to the board of directors children or grandchildren would not meet this definition of charitable class due to its limited size. A scholarship fund cannot be established or operated to assist particular, pre-selected individuals from a limited population.
- No member of the selection committee can benefit, in any way, from choosing the scholarship recipients.
- The organization must ensure that any non-U.S. citizen who receives a scholarship is not on a aapublished “Specifically Designated Nationals” terrorism watch list.
- The criteria for selecting the scholarship recipient must be objective, non-discriminatory, and reasonable related to the purpose of the grant.
- Grants must be made according to a procedure that results in performance by recipients of the activities that the grants are intended to finance.
- The organization must obtain reports from the recipients to determine whether they have performed the intended activities, this could come from the recipient themselves, or in the most prevalent case, from the institution of higher education where the scholarship funds are sent to be awarded to a specifically named scholarship recipient who received the award.
- A grant to an individual can only be renewed if the organization has information indicating the original grant was used for the intended activities.
- Because every situation is unique, and because granting scholarships is a complex undertaking with many potential risks, it is required that you seek approval from TU’s Vice President for Volunteer Operations or TU’s Chief Financial Officer prior to granting scholarships. Additionally, it is advised that your chapter or council seek legal counsel with experience in this area of the law.
Another option to consider for TU chapters and councils that want to grant scholarships is to instead do so by giving money to a third party (i.e. a college or university) and allowing that institution to choose the sponsorship recipient.
Another option is a fellowship grant, which is different from a scholarship because it does not reimburse tuition costs. They are grants that are directly related to the recipient’s education and our exempt purpose. The key to a permissible fellowship grant is that the recipient must render services to the chapter or council that further both the recipient’s education and our exempt purpose. For example, a TU chapter can give a fellowship grant to a biology student who analyzes the water samples taken from the local stream that the chapter is restoring.