IRS Weighs in on Whether Federal Tax Deductions are Allowed for Donations with Recommendations
The IRS Exempt Organizations Office has released a video and accompanying transcript that addresses the question of whether a donor can receive a federal tax deduction for donations to school tuition organizations that include a student recommendation.
The video notes that STOs avoid the private benefit prohibition by not allowing donations that are made on the condition that a particular student receive it (the STO still has a final say in who receives the scholarship) and by disallowing a tax credit if the donor designates the contribution for the benefit of any of the donor's dependents.
As long as these two conditions are met and swapping and other similar methods of having pre-selected, designated beneficiaries and quid-pro-quo arrangements are prohibited, the donor is allowed to take the federal charitable deduction.
The video does note that if the STO distributes these funds to students that the donors delegate or that improperly benefit the organization's principals, this could jeopardize the organization's 501(c)(3) status, so it is important that your STO has procedures in place to award scholarships not solely on the basis of a donor recommendation.
The full video and transcript can be viewed here