Employer-related scholarship procedures are approved

Plain-English summary

A private foundation and another organization proposed scholarships for children of lower-paid employees of companies partly owned by the organizations' substantial contributors and their families. An independent committee would select full-time undergraduate students based on academic promise, citizenship, leadership, community service, financial need, and extracurricular activities. The program imposed no required field of study or employment commitment, and grants could not be used to recruit or retain employees. The IRS approved the procedures under section 4945(g)(1), subject to continued compliance with Revenue Procedure 76-47 and its applicable percentage test. Grants made under the approved procedures would not be taxable expenditures.

Ruling snapshot

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

Full text (IRS public release)

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

                                                Employer Identification Number:

Date: November 23, 2016
                                                Contact person - ID number:

Number: 201707012                               Contact telephone number:
Release Date: 2/17/2017

LEGEND                                         UIL: 4945.04-04

B = Scholarship Program
C = Organization
D = Employer
F = Committee
G = Individual
H = Individual
j = number
k = number
m dollars = dollar amount
n dollars = dollar 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

You, together with C, will operate an employer-related scholarship program, the purpose
of which is to support the pursuit of undergraduate degrees by children of employees of
D. The F will administer the scholarship program, to be known as B.

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D is partially owned by G, a substantial contributor to you, and his family and by H, a
substantial contributor to C, and his family. In addition to providing Scholarship grants to
children of employees of D, you and C may also elect to award Scholarship grants to
children of employees of other companies that are partially owned by G and H and their
respective families. All of the policies and procedures set forth herein with regard to
Scholarship grants awarded to children of employees of D will likewise be applied to all
Scholarship grants awarded by you and C.

The F is composed of individuals appointed by you and C. You will appoint one or two
independent individuals to serve on the F, and C will likewise appoint one or two
independent individuals to serve on the F. At all times, the number of individuals
appointed by each you and C will be equal. An individual is deemed to be “independent”
if such individual has no present or past employment or business relationship with D; no
present or past role as a director, officer, or employee of you or C, as the case may be;
and no family relationship with the family of G or H. In selecting individuals to serve on
the F, each of the Boards will give strong preference to individuals knowledgeable about
education.

B is publicized via notifications and materials that are distributed and made available to
all D employees.

In order to be eligible to receive a Scholarship grant, the applicant must be the child,
stepchild, or adopted child of a Qualified Employee of D. An individual is deemed a
“Qualified Employee” if such individual has been employed by D for at least two years
and such individual’s annual income from D does not exceed m dollars. The Applicant
must be a full-time student with a minimum cumulative grade point average of 3.0.

Applicants will be selected to receive Scholarship grants based on the following criteria,
which should be reflected in the applicant’s personal essay:

•   Past academic achievement and the promise of future academic success
•   Qualities of good citizenship, leadership, and community service
•   Prior academic honors
•   Financial need
•   Extracurricular activities

Although not required, applicants are encouraged to submit up to three written
recommendations from teachers, administrators, and/or community leaders.

The F will weigh all of the information and data submitted by each Applicant. Applicants
will be evaluated and selected on the basis of the quality of their responses to, and/or
satisfaction of, the eligibility criteria stated above. All F determinations of Scholarship
recipients shall be recorded in writing. There is no requirement that Scholarship grant
recipients pursue any particular areas of study, nor is there any requirement or
expectation that Scholarship grant recipients commit to work for, or render services to or
for the benefit of, D.

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It is anticipated that each year the F will award up to j Scholarship grants in the amount of
n dollars, depending on the availability of funds. In any given year, all Scholarship grant
awards shall be for the same amount, based on the availability of funds.

The terms and conditions of the Scholarship grants will be contained in a grant letter sent
to each recipient. The recipient will be required to communicate his or her acceptance of
the Scholarship grant, as well as agreement to the attendant terms and conditions, by
way of a written acceptance letter to the F. The terms and conditions of each Scholarship
grant will include the amount of the award; the name of the school to be attended by the
grant recipient; the requirement to maintain a grade point average of at least 3.0; and
your right to revoke the grant at any time if the terms of the scholarship are violated.

All Scholarship grants shall be for one academic year. Individuals who have previously
received a Scholarship grant may reapply for additional Scholarship grants for any year
during which such individuals maintain eligibility under the general eligibility criteria.

As part of the written acceptance of the Scholarship grant, the recipient is required to
acknowledge that you may, at your discretion, request school-issued information
regarding the recipient’s academic progress (such as a transcript or progress report), and
that the school shall be authorized to disclose such information to you. If, at any time, the
F deems it appropriate to terminate a Scholarship grant due to a violation of the grant
terms, the F will issue a written notification to the Scholarship grant recipient of its
decision to do so. The recipient may request an in-person meeting with the F to request
reconsideration of the revocation decision, and the response to such request shall be
determined in the sole discretion of the F.

Additionally, if the F determines that any portion of a Scholarship grant award has been
misused, they retain the right to require the recipient to repay such misused funds.

The F will receive and review grantee reports annually to monitor compliance with the
Scholarship grant terms; investigate any possible diversion of funds from their intended
purposes; and take all reasonable and appropriate steps to recover diverted funds,
ensure that other grant funds are used for their intended purposes, and withhold further
payments to grantees who are deemed likely to divert funds.

The F will maintain appropriate records and case histories of all recipients of Scholarship
grants.

There are currently close to k Qualified Employees working for D. The number of
Qualified Employees whose children will be eligible to apply for Scholarship grants is
sufficiently large and open-ended so as to constitute a “charitable class.” Furthermore,
the policies and procedures adopted to govern the Scholarship are designed to ensure
that the Scholarship functions exclusively in furtherance of charitable and educational
purposes. Employees of D are not entitled to receive other forms of compensation in lieu
of the Scholarship, nor are employees guaranteed that their children will be selected to
receive a Scholarship grant. There is no additional employment requirement imposed on

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any employee whose child receives a Scholarship grant, nor is there any employment
requirement imposed on the recipient himself or herself. Employment with D as a
“Qualified Employee” is used exclusively as a factor to determine initial eligibility, and the
definition of “Qualified Employee” is structured to ensure that highly-compensated
employees of D are not eligible.

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 you provide scholarships to attend an educational institution to
children of employees of a particular employer without regard to either the 25% limitation
or the 10% limitation described in Revenue Procedure 76-47. Instead, you will award
grants based on facts and circumstances that demonstrate that the grants will not be
considered compensation for past, present, or future services or otherwise provide a
significant benefit to the particular employer.

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.

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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