Employer-related scholarship procedures are approved

Plain-English summary

A private foundation proposed one nonrenewable scholarship each year for a child of a company employee with at least three years of service. Applicants had to be college sophomores, juniors, or seniors with a GPA above 3.0 and were evaluated by an independent committee with education experience. The foundation would pay the recipient's school directly, retain records, investigate misuse, and keep awards within Revenue Procedure 76-47's percentage limits. The IRS approved the procedures under section 4945(g)(1), so awards made as proposed would not be taxable expenditures and would be tax-free to recipients to the extent used for qualified tuition and related expenses.

Ruling snapshot

• Question: Did the foundation's employer-related scholarship procedures satisfy the advance-approval requirements of section 4945(g)(1)?
• Outcome: Approved, subject to the stated procedures and Revenue Procedure 76-47.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)(1); Rev. Procs. 76-47 and 85-51

Full text (IRS public release)

[Redaction note: the IRS release blanks the foundation's identity, employer identification number, contact information, and addressee.]

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

Release Number: 201808023 Employer Identification Number:
Release Date: 2/23/2018
Date: November 28, 2017 Contact person - ID number:

                                                           Contact telephone number:

LEGEND: UIL:
X = scholarship 4945.04-04
Y = company

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 will operate an employer-related scholarship program called X. The purpose of X is
to award one scholarship per year to a child of a current employee of Y to attend a post-
secondary educational institution. The maximum amount of X will be determined by your
trustees each year and is not renewable. X will be publicized on Y’s intranet website or
by any other appropriate method.

X will not be used as an inducement for employment or recruitment for Y, and there will
be no commitments or understandings that the studies are for the benefit of you or Y.
There will also be no requirement, condition or suggestion, express or implied, that the
recipient's parent is expected to render future employment services for you or Y. X will
not be terminated if the recipient's parent terminates employment with Y subsequent to

Letter 4793 (10-2012)
Catalog Number 58264E

2

the awarding of the grant, regardless of the reason for such termination of the
employment.

To be eligible the applicant must:

a. Be the child of a current employee of Y with three or more years of service;

b. Be in their sophomore, junior or senior year at a certified, post-secondary education
institution;

c. Have a current GPA greater than 3.0;

d. Submit a current resume or curriculum vitae;

e. Submit 1-3 recommendations from current/past instructors; and

f. Submit an essay of no longer than 300 words about why they should be considered
for X

The recipient will be chosen by an independent selection committee consisting of at least
two members who are knowledgeable in the education field and must have secondary or
post-secondary education experience. The independent selection committee will not have
any members who are current or former employees of Y or were your current or former
trustees.

The number of grants awarded each year will not exceed 25 percent of the number of
employees' children who, (i) were eligible, (ii) were applicants for such grants, and (iii)
were considered by the selection committee in selecting the recipients of grants in that
year, or 10 percent of the number of employees’ children who can be shown to be eligible
for grants (whether or not they submitted an application) in that year.

You will give the scholarship funds directly to the recipient’s educational institution to be
applied to the student's tuition bill. Funds may be applied by the educational institution to
any qualified tuition as defined in IRC Section 117(b)(2). The educational institution will
be instructed to refund to you any unused scholarship funds.

The educational institution will be required to provide financial records and
correspondence showing disbursement of scholarship funds. You will keep all records
related to X in accordance with your record retention policy. If there is reason to believe
that funds have been misappropriated you will investigate the claims with the help of the
school’s Bursar’s office.

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.

Letter 4793 (10-2012)
Catalog Number 58264E

3

• 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.

Letter 4793 (10-2012)
Catalog Number 58264E

4

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.

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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4793 (10-2012)
Catalog Number 58264E