Employer STEM scholarship procedures are approved

Plain-English summary

A private foundation proposed two-year scholarships for children of a company's employees who were pursuing community or technical college training for middle-skill STEM careers. An independent scholarship administrator would select recipients based on academic achievement, financial need, STEM interest, and civic engagement, with preference for first-generation college students. Awards would be paid directly to schools, require annual progress reports, and remain available even if the recipient's parent stopped working for the company. The program would not be used to recruit or retain employees, and annual grants would stay within the applicable Revenue Procedure 76-47 percentage limit. The IRS approved the procedures under section 4945(g)(1), so grants made as represented would not be taxable expenditures.

Ruling snapshot

• Question: Did the employer-related STEM scholarship procedures qualify for advance approval under section 4945(g)(1)?
• Outcome: approved, subject to continued compliance with the stated procedures and percentage tests
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), and 4946; Rev. Procs. 76-47 and 85-51

Full text (IRS public release)

Internal Revenue Service                         Department of the Treasury

P.O. Box 2508
Cincinnati, OH 45201

Employer Identification Number:

Date: August 31, 2016
Contact person - ID number:

Number: 201648017 Contact telephone number:
Release Date: 11/25/2016

LEGEND UIL: 4945.04-04

X = For-Profit Company
Y = Scholarship Management Company
r = Amount

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 to support
the education of children of employees of X.

The purpose of your program is to award recipients with a two-year scholarship to defray
a portion of the costs of tuition for community and technical college. Eligible individuals
will generally be students who are dependent children up to 26 years of age of
employees of X, or are entering their final year of high school, or have completed their
high school or high school equivalency program studies, and have demonstrated strong
interest in middle-skill STEM (science, technology, engineering and math) careers

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including, but not limited to, careers in healthcare, information technology, energy, and
advanced manufacturing fields.

The number and the amount of the scholarships are varied depending upon the available
funds. However, the number of the grants awarded in any year will not exceed twenty-
five percent of the number of X employees’ children who were eligible. The scholarships
will consist of grants of r dollars per year for two years. The grants will be used to defray
the cost of tuition at any qualified educational institution.

The grants awarded will be based on the interest of the students in middle-skill STEM
careers, grade point average and academic achievements, financial need, and interest in
civic engagement, including volunteer leadership, military service, and other volunteer
service opportunities. The grant funds will be distributed directly to each educational
institution to defray the cost of tuition on an agreement that it will not consider the grant in
its calculation of the student's financial need. Preference will be given to students who
would be the first in their families to attend college. The grants will not be used by you or
X in recruiting employees or inducing current employees to remain in their employment.

Eligible individuals will be required to submit the applications and supplemental
information including the evidence of employment status of parents with X to Y. Y is
contracted to administer your scholarship program. Y is an independent scholarship
administrator who will review and select the qualified recipients of the scholarship grants.

The recipients may not be relatives of your officers or directors or relatives of your
substantial contributors, and may not otherwise be disqualified persons as described in
Code Section 4946. The selection of the grant recipients cannot result in any private
benefit to X, Y, or any officer, director, or substantial contributor, or otherwise disqualified
person to you.

A grant recipient can receive subsequent annual installments of his or her grant if the
recipient remains in good standing with his or her educational institution. Failure to meet
this requirement will result in termination of the grant. In addition, subsequent annual
installments of the grant funds will not be terminated because of termination of
employment of the employees with X, regardless of the reason for such termination. In
addition, there will not be any requirement, condition or suggestion whether expressed or
implied, at the time your grants are initially awarded or when additional installments are
paid that the grant recipient or his or her parent is expected to render future employment
services to you or X, or be available for such future employment.

Recipients of the scholarship grants will be required to provide a progress report verified
by the educational institution at least once annually. The report will include the recipient's
courses taken and grades received. You will also require a final report upon the
conclusion of the grant. Because the scholarship grants will be paid directly to the
recipients’ educational institutions, you do not expect a misuse of grant funds.

The scholarship program will be advertised throughout X, including X’s intranet, internal
social media platforms, posters, “town hall’ meetings, and internal press releases.

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Information about grants will also be posted on your website, and the grant recipients will
be featured on your intranet page, which is also accessible by X employees.

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 will not 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

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4

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 do
not 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.

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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

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