Employer-related scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed a scholarship program for children of U.S.-based employees of a related employer. An independent committee would select recipients using financial need, academic promise, leadership, character, and an additional essay, and awards could be renewed for qualifying college or vocational students. The program would not be used to recruit or retain employees, awards would continue if a recipient's parent left the employer, and the combined employer-related programs would comply with the 25 percent selection limit. Scholarship payments would go directly to schools for tuition and fees, with reporting, recordkeeping, and diversion-recovery procedures. The IRS approved the procedures under IRC § 4945(g)(1), so compliant expenditures would not be taxable to the foundation and qualifying awards used for tuition and related expenses would not be taxable to recipients.

Ruling snapshot

• Question: Do the foundation's employer-related scholarship procedures qualify for advance approval?
• Outcome: Approved, provided the program operates as represented and continues to meet the applicable percentage and procedural tests.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g); Rev. Proc. 76-47; Rev. Proc. 85-51

Full text (IRS public release)

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

Number: 201721023 Employer Identification Number:

Release Date: 5/26/2017
Contact person - ID number

Date: March 3, 2017 Contact telephone number:
LEGEND UIL: 4945.04-04

B= Name

C= Employer

D= Name

E= Number

F= Time period

G= Subject

x dollars= 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 called B
for United States based employees of C. As part of your charitable activities, you
currently operate an academic scholarship program for the children of United States
based employees of C called D, which was approved in your determination letter.

Letter 4793 (10-2012)
Catalog Number 58264E


The purpose of B is to assist children of United States based C employees and its
affiliates to attend a qualified post-secondary institution of their choice and pursue any
course of study they choose. The term “children” includes the natural and adopted
children, stepchildren, and legal wards of the employee for whom the employee is
financially responsible. The term “children” also includes those natural and adopted
children, stepchildren, and legal wards of the employee’s spouse or domestic partner for
whom the employee is financially responsible. You anticipate that the maximum amount
of each scholarship for B will be x dollars.

You will distribute announcements of the scholarships to C employees. It is your policy
that any announcement of the scholarships offered under B will clearly show you as the
grantor of the scholarship awards.

To be eligible for B, applicants must be children of active, full-time, regular, employees of
C (excluding members of C’s Board of Directors, its Officers, and members of your Board
of Directors or administrator) as of the date of the scholarship award. Applicants for B
must also be incoming first year, full time post-secondary students. In addition, the
employee must have been employed by C for F prior to the date of the scholarship
award.

You anticipate that there will be a single application for B and D except applicants for B
must answer an additional essay question focusing on G to be eligible for consideration.
An eligible applicant who responds to the additional essay question will be considered for
both B and D (assuming that his or her application is otherwise complete), although the
applicant will only be awarded one scholarship under either of the programs. A
completed application requires attachments such as an essay, standardized test results,
financial information including relevant tax returns of their parents and the student aid
report from FAFSA, sealed copies of transcripts and recommendations.

The Scholarship Review Committee which is comprised of individuals totally independent
and separate from you and C will choose the recipients of all scholarships under B and D
as well as determine the amounts that are awarded to each scholarship recipient. The
Scholarship Review Committee members are currently selected by an independent third
party which is an operating unit of an organization that has been recognized by the IRS
as a public charity. The Scholarship Review Committee consists of current or former
financial aid officers, college admission officers and educational professionals. If there is
a vacancy on the Scholarship Review Committee, the third party selects a qualified
individual to fill the vacancy. In no event will any employee or former employee of yours
or C serve on the Scholarship Review Committee.

The Scholarship Review Committee will use objective selection criteria including financial
need, academic promise, and qualities of leadership, general promise, and moral and
civic character as well as the additional essay question of G to award scholarships under
B. An eligible applicant who chooses not to answer the additional essay question will be
eligible for only D. (Assuming that his or her application is otherwise complete). No

Letter 4793 (10-2012)
Catalog Number 58264E


member of the Scholarship Review Committee will be in a position to derive a private
benefit, directly or indirectly, if certain potential grantees are selected over others.

You will permit the renewal of a scholarship awarded to a student attending a college or
university for up to three years after the initial year while you will permit the renewal of a
scholarship awarded to a student attending a vocational or technical school for one year
after the initial year. Once awarded, a scholarship granted will not be terminated if the
recipient's parent (or stepparent or guardian, as the case may be) is no longer employed
by C.

When determining whether to renew a student's scholarship, the Scholarship Review
Committee will consider the student's satisfactory progress toward a degree (or
certification) as shown by the student’s transcript and continued display of good moral
and civic character and general promise. At a minimum, a student must maintain a
cumulative “B” average, which is a grade point average of 3.0 on a scale of 4.0, or an
equivalent average on any other scale. If a student does not maintain a cumulative “B”
average, the Scholarship Review Committee may deny renewal of such student's
scholarship, unless the student petitions the Scholarship Review Committee and
presents evidence of severe hardship or extenuating circumstances. In such cases, the
Scholarship Review Committee may, in its discretion, consider whether this justify
renewal of the student’s scholarship.

You will pay a student's scholarship in full at the beginning of the school year directly to
the educational institution the student is attending for credit to the student's account;
provided, however, that the educational institution first agrees to only use the funds to
defray the student's tuition and fees. An applicant must be accepted by the qualified post-
secondary institution of his or her choice prior to payment of the grant. A scholarship shall
be terminated when the scholarship recipient ceases to be an enrolled student at the
approved institution. Any unused portion of a terminated scholarship must be refunded to
you by the educational institution the student is attending according to its normal policy
regarding tuition refund.

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 stops to recover
diverted funds, ensure other grant funds held by a 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 diversions from occurring.

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.

Letter 4793 (10-2012)
Catalog Number 58264E


Concerning Revenue Procedure 76-47, B will not be used by you or C as an inducement
to recruit or retain employees. Once awarded, a scholarship granted will not be
terminated if the recipient’s parent (or stepparent or guardian, as the case may be) is no
longer employed by C. The total number of scholarships awarded in any year will not
exceed 25% of the number of employee’s children who were eligible for such
scholarships, who applied for such scholarships, and were considered by the Scholarship
Review Committee in selecting the recipients of grants in that year, in keeping with the
25% test of Section 4.08 of Rev. Proc. 76-47, 1976-2 C.B. 670 (the “25% test”). You
anticipate that up to E scholarships will be awarded each year under B and that the
balance of the scholarships permitted under the 25% test will be awarded under D.

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.

Letter 4793 (10-2012)
Catalog Number 58264E


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.

Letter 4793 (10-2012)
Catalog Number 58264E


• 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