Employer-related scholarship procedures are approved

Plain-English summary

A private foundation proposed scholarships for current, retired, and former employees of an employer and its affiliates, as well as their spouses, children, and grandchildren. An independent selection committee would choose recipients using objective criteria such as academic performance, character, potential, financial need, and ability to complete and finance the proposed course of study. The foundation would pay schools directly, review transcripts, investigate misuse, seek recovery of diverted funds, and limit recipients to eight academic semesters. The IRS approved the procedures under section 4945(g)(1), conditioned on operating the program as represented and satisfying Revenue Procedure 76-47. Scholarships made under the approved procedures would not be taxable expenditures, and recipients would not be taxed on amounts used for qualified tuition and related expenses within section 117(b).

Ruling snapshot

• Question: Did the employer-related scholarship procedures qualify for advance approval under section 4945(g)(1)?
• Outcome: approved, subject to the stated procedures and Revenue Procedure 76-47 conditions
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B), and 4945(g)(1); 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

Release Number: 201649019                        Employer Identification Number:
Release Date: 12/2/2016
Date: September 7, 2016                          Contact person - ID number:

                                                 Contact telephone number:

LEGEND                                          UIL: 4945.04-04

B = Scholarship Program
C = Employer Name
D = Related Entity Names
E = Entity Name
F = Individual

v dollars = Amount
w dollars = Amount
x dollars = Amount

Dear           :

You asked for advance approval of your employer-related scholarship 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 called B.

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The purpose of B is to provide scholarships to current, retired and former associates of C
and its numerous affiliated entities consisting of D, and the spouses, children or
grandchildren of such individuals, who are attending, or have been accepted and will be
attending within the next calendar year, a college, university, graduate school or
professional school that is qualified under Section 170(b)(1)(A)(ii). Recipients will be
awarded a scholarship of up to x dollars per academic semester for the payment of
tuition, fees required for enrollment or attendance, books, supplies, and equipment
required for courses of instruction at the educational institution described in the
scholarship application.

F, the founder of C will make an initial contribution of v dollars. You anticipate an annual
budget in the range of w dollars for B. You formed E, a limited liability company in which
you are the sole member, to administer B.

You will advertise B in the associate handbook which will be updated to provide
information about B as well as by including advertisements in internal publications and
emails circulated among the current and retired associates of C and D approximately six
months prior to the start of the next succeeding fall or spring academic semester, and
each fall and spring semester thereafter. These advertisements will contain a description
of B, a summary of the eligibility criteria and the application-filing deadline, as well as the
name and contact information of the person from whom additional information can be
obtained.

Individuals will have until the application filing deadline to submit an application. Each
application will include:

a)      The applicant’s name and contact information;
b)      The name and contact information of the college, university, graduate school or
        professional school that is qualified under IRC section 170(b)(1)(A)(ii) to be
        attended by the applicant;
c)      A written description of the applicant’s proposed or current course of study;
d)      A personal statement;
e)      A grade transcript from the applicant’s high school and all other institutions of
        higher learning previously attended by the applicant;
f)      One or more letters of recommendation in support of the applicant’s application;
        and
g)      A completed financial disclosure form.

After each filing deadline, the members of the E Selection Committee, will review all the
applications. The E Selection Committee will be comprised of two to five individuals and
will be appointed by a majority of your Board of Directors for the sole purpose of
reviewing applications. In addition, the E Selection Committee will be required to include
at least one individual with significant experience in the field of education and training.
The following classes of individuals and the family members of such individuals will not
be allowed to serve on the Selection Committee:

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1.  Current associates of C and D, and their spouses, children or grandchildren;
2.  Current shareholders, partners, members, officers, and directors of C and D;
3.  Current members and managers of E;
4.  Your current officers, directors, and members; and
5.  Any individual who has made an annual contribution to during the current tax year
    in excess of $5,000, if such amount exceeds 2% of the total contributions received
    by you in such year.

After reviewing the applications, the Selection Committee will award scholarships
based on each applicant’s:

1.  Prior academic performance;
2.  Motivation, character, ability, and potential;
3.  Ability to complete the contemplated course of study;
4.  Financial need; and
5.  Ability to finance the balance of the cost of the education.

The recipients and amount of each scholarship will be determined in the sole and
absolute discretion of the Selection Committee. Scholarships will be awarded
solely based on the foregoing objectives and non-discriminatory criteria and not on the
basis of race, color, creed, gender, religion, marital status, age, sex, national origin or
ancestry.

The following classes of individual and the family members of such individual are not
eligible and may not be awarded scholarships, regardless of whether they otherwise
meet the qualification criteria:

a)      Current shareholders, partners, members, officers, and directors of C and D;
b)      Current members and managers of E;
c)      Your current officers, directors, and members;
d)      Current members of E Selection Committee and their spouses, children or
grandchildren; and
e)      Any individual who has made an annual contribution to you during the current tax
year in excess of $5,000, if such amount exceeds 2% of the total contributions received
by you in such year.

The recipients will be required to provide you with account information for their
educational institutions and the scholarship will be paid directly to such
institutions. Each recipient will be required to agree to deliver an official academic
transcript from the educational institution to you immediately following completion of the
academic semester for which the scholarship is made. Following completion of the
academic semester, academic transcripts will be reviewed to ensure that scholarships
have been used for the educational purposes described in each recipient’s scholarship
application. Where a recipient fails to submit an academic transcript, or where a recipient
submits an academic transcript that suggests that such recipient’s scholarship is not

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being used in the manner described in the recipient’s scholarship application, you will
investigate the manner in which the scholarship was utilized. During the course of any
such investigation, no further scholarships or payments of any kind will be made to or for
the benefit of such recipient. If the results of your investigation indicate that a scholarship
was not used in furtherance of the education and training described in the recipient’s
scholarship application, you will take all reasonable and appropriate steps to recover the
scholarship. This will include recovery of any unused portion of the scholarship directly
from the educational institution to which such scholarship was paid, and recovery of any
portion of improperly diverted grant funds from the recipient directly, including legal action
if necessary and likely to result in the satisfaction of execution on a judgment.

Regardless of whether funds are ultimately recovered by you, any recipient
who is found to have used all or a portion of a scholarship in a manner
inconsistent with that described in the recipient’s scholarship application will be
disqualified from applying for future scholarships under the scholarship program.

When a recipient submits an academic transcript that indicates that the
scholarship has been properly used in the manner described in the scholarship
application, such recipient will be eligible to apply for a renewal of his or her scholarship
in a subsequent academic semester. Any such recipient will be required to submit a
renewal scholarship application in the same form and manner as an initial scholarship
application, and a recipient may receive a scholarship for no more than eight (8)
academic semesters.

Your program will be conducted in accordance with all of the guidelines of sections 4.01
through 4.07 of Revenue Procedure 76-47. You have agreed that your program will
generally meet the requirements of either the 25 percent or 10 percent percentage test of
Section 4.08 Revenue Procedure 76-47.

Based on the wide availability of the scholarship program you have demonstrated that the
recipients will not be drawn from a specific group of employees. In particular, the
selection of individual grant recipients will be made by E. The grants will not be used as
a means of inducement to recruit employees nor will the recipient be restricted in a
course of study that would be of particular benefit to C, D or to you.

You agree to maintain certain information about your program in accordance with Code
Section 4945(d)(3), including the following:

•   The information used to evaluate the qualifications of potential grantees;
•   Identification of the grantees (including any relationship of any grantee to you),
    the amount and purpose of each grant;
•   All reports and other follow-up data obtained in administering your scholarship
    program.

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

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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
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:

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•   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.

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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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