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Nonprofit Law/Question about scholarships, the government, and the law

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QUESTION: Hi Harvey,

If I wanted to offer a scholarship on my website to young people that are in school, and the scholarship would be a set amount of money that's awarded to someone enrolled in school that could use the money to pay for a portion of their tuition or school related expenses (books, room and board, etc), is there anything specific that I would need to do?

Meaning, is this something that needs to be cleared by the IRS?  Are there tax hurdles that need to be jumped?  Are there waivers that need to be signed, etc?

A quick background--I am not part of an organization, but I have a website that's very informational and that is quite helpful to my visitors.  It also makes me some money thanks to a few ads that are placed on the site.

As for the scholarship, I would like to offer the selected winner anywhere from $250 to $500, to be paid via check, to someone genuinely in need of the money for school.  I would also like to have an essay be required by those that apply.

But in all, I was very curious what might need to be done overall.  I don't know if the amount of money being offered for the scholarship might prove to be any kind of issue, if any person or organization offering a scholarship or grant needs to proceed with any kind of government-related protocol, etc.

Any help/direction would be very much appreciated.  Thank you for your time!

ANSWER: As an individual you may offer gifts to persons and there is no tax liability. The Internal Revenue Code at section 102(a) provides that gifts are not income.  "Gross income does not include the value of property acquired by gift..."
http://codes.lp.findlaw.com/uscode/26/A/1/B/III/102

It appears that none of the gifts are going to your employees, if they did, then note that section 102(c) of the Code has "Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee...."

There are no government approvals needed nor any forms to be filed.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    





---------- FOLLOW-UP ----------

QUESTION: Thank you for your quick reply.

I do have a follow-up.  

If one refers to their "gift" as a "scholarship" (even if it's not being offered by an official organization), do you think that would be viewed differently by the IRS or government?

In other words, if I want to essentially create a contest for someone to win a set amount of money they can put towards their school expenses, but I was to "dress it up" as a scholarship so it looks a lot more professional, is it possible that in dressing it up, it gets interpreted differently?  And, if it's interpreted differently, would there be a different set of rules/policies I would have to follow?

Thanks again.

ANSWER: Earlier you did not use the word "contest". Give me the details of the contest (including any requirements of the applicants and who will choose the winners and on what basis and then I will reply further.

Also then let me know how, if your payments are to the individuals, you will insure the use of the funds.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    




---------- FOLLOW-UP ----------

QUESTION: Hi,

Thanks for your reply.

Well, essentially, isn't a scholarship and a contest the same thing, just called different things by different people?  For example, you can have a screenwriting contest, where the winning writer gets a $500.00 check.  Or you can have a screenwriting scholarship, where the winner gets $500.00 he or she can put towards their screenwriting education.  

I'm using that as an example, of course, but they're essentially the same thing, right?  

But as I said before, I'd essentially like to create a contest but simply refer to it a scholarship when I promote it on my website.  

So, for example, I would like to have individuals who are, for example, single parents that are interested in becoming nurses (and are currently enrolled in school) have the ability to submit an essay to me (between 500 and 1,000 words) on why they're working to become a nurse, the struggles of being a single parent who balances school and classwork, and how they want to make a positive impact on their community, and what the money will of course mean for them both personally and professionally.

I would then select the winner based on the person who wrote, in my opinion, the best essay .  There may be a few other small requirements (like applicants would need to be aged 18-35, for example, and would need to provide me with simply the name of the college or training program they are enrolled in).  

I would choose the winner myself, based on who I felt wrote the most moving essay and who I feel seems passionate about becoming a nurse, who loves their community, and who it seems could most benefit from receiving the money I'm offering.

The selected winner would then receive either $250 or $500.  It would be paid to the winner via a check sent in the mail.  I would provide the check, and the funds would come out of my own bank account.  

I won't ask any personal information of the applicants aside from their first and last name.  It won't cost them any money to apply, and certainly won't need to provide anything incriminating or dangerous like their social security numbers.

I will mandate, however, that the winner be okay with having their first and last name published on the website as the winner, along with their location (city and state).  I may ask them to provide a photo of themselves, too, so that it could be posted in the "winners" section of the website, which I would hope to help validate the scholarship (and my website) for anyone else who might come along and see it in the future.

I'm not quite sure what you mean when you say "you will insure the use of the funds?"  Do you mean, will I literally take out insurance or something?  Or are you saying, will I ask for proof that they will use the winning funds on their school or tuition instead of, say, groceries, DVD movies, and an evening out dancing?

Well, if it's the former, no, I don't plan to take out any insurance on the money I send the winner.  And if it's the latter, no, I will not require any winner to prove to me that they spent the money on books or tuition.  However, the contest would be created for that purpose, so I would certainly hope that those who are truly in need of the money would use it accordingly and for that purpose.

And lastly, just getting back to this contest vs. scholarship thing.  The reason I want to call it a scholarship and not a contest is because, to me, the phrase "nursing scholarship" sounds far more professional than "nursing contest."  The word contest, in relation to the health or medical field, sounds quite gimmicky and unprofessional, which is why I'd much prefer to refer to it as a scholarship.

I hope that helps you.  And thanks for helping me today.

Answer
I am assuming that none of the recipients are your employees or relatives.

In the Internal Revenue Regulations 1.117-3(a) we see a definition for "Scholarship", which is  "A scholarship generally means an amount paid or allowed to, or for the benefit of, a student, whether an undergraduate or a graduate, to aid such individual in pursuing his studies.... However, the term does not include any amount provided by an individual to aid a relative, friend, or other individual in pursuing his studies where the grantor is motivated by family or philanthropic considerations." http://www.law.cornell.edu/cfr/text/26/1.117-3

You are an individual and, therefore, the term "scholarship" would not apply because you are motivated by philanthropic considerations.

The recipients would not have taxable income from the grants as there it appears that there is no "contest", but simply presentations to you for consideration as to who should be given the grant.  If it were a "contest, then the Regulation at 1.74-1 provides that the money would be taxable to the recipient. http://www.law.cornell.edu/cfr/text/26/1.74-1

You are welcome.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

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Harvey Mechanic

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I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


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