Employee-dependent scholarship procedures received approval

Plain-English summary

A private foundation proposed scholarships for dependents of a company's employees to attend accredited undergraduate or technical programs. An independent, education-focused committee would select recipients using grades, extracurricular activity, need, community involvement, and work experience, and funds would be paid directly to schools for full-time students. The awards were nonrenewable, subject to a stated maximum, and could not be used to recruit or retain employees or direct students into courses benefiting the employer. The foundation committed to Revenue Procedure 76-47's safeguards and to awarding no more than the applicable 25 percent or 10 percent limit. It also committed to grant monitoring, recovery of diverted funds, and complete records. The IRS approved the employer-related scholarship procedures under section 4945(g)(1).

Ruling snapshot

• Question: Did the employer-related scholarship program satisfy the advance-approval rules and percentage limits?
• Outcome: Approved while the program complies with Revenue Procedure 76-47
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)(1); Rev. Procs. 76-47, 80-39, and 85-51

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201623015
Release Date: 6/3/2016
Employer Identification Number:

Date: March 11, 2016
Contact person - ID number:

Contact telephone number:

LEGEND

C= Organization
d dollars = Amount

UIL: 4945.04-04

Dear                         :

You asked for advance approval of your employer-related scholarship grant procedures
under Internal Revenue Code section 4945(g). This approval is required because you are
a private foundation that is exempt from federal income tax. You requested approval of
your scholarship program to fund the education of certain qualifying students.

Our determination

We approved your procedures for awarding employer-related scholarships. Based on the
information you submitted, and assuming you will conduct your program as proposed, we
determined that your procedures for awarding employer-related scholarships meet the
requirements of Code section 4945(g)(1). As a result, expenditures you make under
these procedures won't be taxable.

Also, awards made under these procedures are scholarship or fellowship grants and are
not taxable to the recipients if they use them for qualified tuition and related expenses
(subject to the limitations provided in Code section 117(b)).

Description of your request

Your letter indicates you will operate an employer-related scholarship program. The
purpose of your scholarship program is support the higher education of eligible
applicants. You will award scholarships to dependents of C employees to pursue
undergraduate studies at accredited post-secondary educational institutions and/or
technical schools.

Your scholarships will be publicized through C’s internal employee communications such
as newsletters, posters, and the internal intranet website for employees as well as on C’s
external website. Eligible applicants who apply for scholarships must provide you with
documentation evidencing their age and status as a dependent of an employee. The
determination of age and proof of relationship will be based on the same eligibility criteria

Letter 4793 (10-2012)
Catalog Number 58264E

required to be enrolled in certain fringe benefit plans offered by C to employees. Eligible
applicants must also reside in the United States.

Scholarship recipients will be selected from all eligible applicants who submit the
electronic application. Recipients will be selected based on grade point average,
participation in extracurricular activities, economic need, community involvement, and
work and internship experience. You will require official transcripts for proof of GPA and
reports from C’s human resources department to confirm that applicants are eligible
dependents of employees. Scholarships are not renewable. Previous recipients must
reapply if they would like to be selected for another scholarship. The maximum amount of
any scholarship will not exceed d dollars. The scholarship amount may vary on a
scholarship by scholarship basis and will be determined by the Scholarship Selection
Committee.

All scholarships will be paid directly to the institutions the recipients will be attending with
instructions to apply the scholarship funds only if the students are enrolled full-time. The
educational institutions will be instructed to return any scholarship funds if a student is not
enrolled full-time or has withdrawn from the school.

The Selection Committee will be appointed by your Board and will be made up of
individuals who are not employees or former employees of C. The individuals will not be
members of your board and will otherwise be independent of you, your organizer, and C.
The members of the Selection Committee will be knowledgeable in the education field.
Relatives of members of the Selection Committee or of your officers, directors, or
substantial contributors are not eligible for scholarships.

You represent that you will comply with the seven conditions set forth in Revenue
Procedures 76-47, 1976-2 C.B. 670, and 80-39, 1980-2 C.B. 772, which apply to
inducement, selection committee, eligibility requirements, objective basis of selection,
employment, course of study, and other objectives. In addition, each year you will award
scholarships to either (1) 25% or fewer of the eligible applicants who were considered by
the Selection Committee in selecting recipients of scholarships in that year, or (2) 10% or
fewer of the number of employees’ children who can be shown to be eligible applicants in
that year, whether or not they submitted an application. In applying the limitation based
on 10% of eligible applicants, you will utilize written statements included in the records
maintained by C’s human resources department. In order for dependents between 19-24
years of age to be eligible for certain travel benefits, the employee must register the
dependent and affirmatively indicate the dependent is enrolled in a post-secondary
educational institution. You will use the number of registered student dependents
between 19 and 24 years of age in applying the 10% limitation to verify the number of
employee’s children show can be shown to be eligible applicants.

You represent that you will (1) arrange to receive and review grantee reports annually
and upon completion of the purpose for which the grant was awarded, (2) investigate
diversions of funds from their intended purposes, and (3) take all reasonable and
appropriate steps to recover the diverted funds, ensure other grant funds held by a

Letter 4793 (10-2012)
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grantee are used for their intended purposes, and withhold further payments to grantees
until you obtain grantees’ assurances that future diversions will not occur and that
grantees will take extraordinary precautions to prevent future diversion from occurring.

You also represent that you will maintain all records relating to individual grants including
information obtained to evaluate grantees, identify whether a grantee is a disqualified
person, establish the amount and purpose of each grant, and establish that you
undertook the supervision and investigation of grants described above.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(Code section 4945). A taxable expenditure is any amount a private foundation pays as a
grant to an individual for travel, study, or other similar purposes. However, a grant that
meets all of the following requirements of Code section 4945(g) is not a taxable
expenditure.

• The foundation awards the grant on an objective and nondiscriminatory basis.
• The IRS approves in advance the procedure for awarding the grant.
• The grant is a scholarship or fellowship subject to Code section 117(a).
• The grant is to be used for study at an educational organization described in Code
  section 170(b)(1)(A)(ii).

Revenue Procedure 76-47, 1976-2 C.B. 670, provides guidelines to determine whether
grants a private foundation makes under an employer-related program to employees or
children of employees are scholarship or fellowship grants subject to the provisions of
Code section 117(a). If the program satisfies the seven conditions in sections 4.01
through 4.07 of Revenue Procedure 76-47 and meets the applicable percentage tests
described in section 4.08 of Revenue Procedure 76-47, we will assume the grants are
subject to the provisions of Code section 117(a).

You represented that your grant program will meet the requirements of either the 25
percent or 10 percent percentage test in Revenue Procedure 76-47. These tests require
that:

• The number of grants awarded to employees’ children in any year won’t exceed 25
  percent of the number of employees’ children who were eligible for grants, were
  applicants for grants, and were considered by the selection committee for grants,
  or

• The number of grants awarded to employees’ children in any year won’t exceed 10
  percent of the number of employees’ children who were eligible for grants
  (whether or not they submitted an application), or

• The number of grants awarded to employees in any year won’t exceed 10 percent
  of the number of employees who were eligible for grants, were applicants for
  grants, and were considered by the selection committee for grants.

You further represented that you will include only children who meet the eligibility
standards described in Revenue Procedure 85-51, 1985-2 C.B. 717, when applying the
10 percent test applicable to employees’ children.

In determining how many employee children are eligible for a scholarship under the 10
percent test, a private foundation may include only those children who submit a written
statement or who meet the foundation's eligibility requirements. They must also satisfy
certain enrollment conditions.

You represented that your procedures for awarding grants under this program will meet
the requirements of Revenue Procedure 76-47. In particular:

• An independent selection committee whose members are separate from you, your
  creator, and the employer will select individual grant recipients.

• You will not use grants to recruit employees nor will you end a grant if the
  employee leaves the employer.

• You will not limit the recipient to a course of study that would particularly benefit
  you or the employer.

Other conditions that apply to this determination:

• This determination only covers the grant program described above. This approval
  will apply to succeeding grant programs only if their standards and procedures
  don’t differ significantly from those described in your original request.

• This determination is in effect as long as your procedures comply with sections
  4.01 through 4.07 of Revenue Procedure 76-47 and with either of the percentage
  tests of section 4.08. If you establish another program covering the same
  individuals, that program must also meet the percentage test.

• This determination applies only to you. It may not be cited as a precedent.

• You cannot rely on the conclusions in this letter if the facts you provided have
  changed substantially. You must report any significant changes to your program to
  the Cincinnati Office of Exempt Organizations at::

Internal Revenue Service
Exempt Organizations Determinations
P.O. Box 2508
Cincinnati, OH 45201

• You cannot award grants to your creators, officers, directors, trustees, foundation
  managers, or members of selection committees or their relatives.

• All funds distributed to individuals must be made on a charitable basis and further
  the purposes of your organization. You cannot award grants for a purpose that is
  inconsistent with Code section 170(c)(2)(B).

• You should keep adequate records and case histories so that you can substantiate
  your grant distributions with the IRS if necessary.

We've sent a copy of this letter to your representative as indicated in your power of
attorney.

Please keep a copy of this letter in your records.
If you have questions, please contact the person listed at the top of this letter.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Letter 4793 (10-2012)
Catalog Number 58264E