Franchise-employee scholarship procedures are approved

Plain-English summary

A private foundation proposed scholarships for employees of independently owned franchises pursuing undergraduate or vocational education. An unrelated Section 501(c)(3) organization would administer the online application, determine eligibility, choose recipients, pay awards to schools, handle refunds, and maintain records. Foundation insiders, related business personnel, and franchise owners could not select recipients, except that franchise operators could verify employment or provide requested evaluations. The IRS approved the objective and nondiscriminatory procedures under Section 4945(g)(1). Compliant grants would not be taxable expenditures and would be tax-free to recipients to the extent used for qualified tuition and related expenses under Section 117(b).

Ruling snapshot

• Question: Did the independently administered franchise-employee scholarship program satisfy the advance-approval rules?
• Outcome: Approved, effective June 12, 2017, subject to the stated procedures and continuing conditions.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g)(1)

Full text (IRS public release)

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

Release Number: 201826017
Release Date: 6/29/2018 Employer Identification Number:

                                              Contact person - ID number:
                                              Contact telephone number:

Date: April 6, 2018

LEGEND UIL: 4945.04-04
B = Name
C = Name
D = Organization
E = Individual
F = Number
G = Number
w dollars = Amount
x dollars = Amount

Dear :

You asked for advance approval of your 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 scholarships. Based on the information
you submitted, and assuming you will conduct your program as proposed, we
determined that your procedures for awarding 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)). The effective date of this
approval is June 12, 2017.

Description of your request

Your letter indicates you will operate a scholarship program called B. The purpose of B is
to award educational scholarships to employees of C franchises for undergraduate study
at a college or university or for a certificate program at a vocational-technical school. B is
publicized through announcements posted in individual C franchises and on the C
intranet, which is accessible to C franchise employees.

You have established that for an applicant to be eligible, an applicant must:

• Have been employed for at least six continuous months by a C franchise located
in the United States as of the application deadline.

• Be a high school senior or high school graduate or currently enrolled in a post-
secondary undergraduate program or a vocational or technical certificate program.

• Have a minimum grade point average of 2.5 on a 4.0 scale, or equivalent.

• Plan to enroll for the entire academic year in a full- or part-time under-graduate
program at an accredited two-or four-year college or university or at a vocational
or technical school located in the United States or Washington D.C.

• Be employed by a C franchise at the time the awards are announced; however,
scholarship recipients are not required to be employed by a C franchise at the time
the awards are paid.

Neither you nor any of your disqualified persons own or operate a C franchise. Each C
franchise is independently owned and operated. Moreover, there are currently over F
U.S.-based C franchise employees and most of these employees are eligible to
participate in B. B is solely for the benefit of C franchise employees who wish to pursue
their education and employees of other C related business entities and their family
members are not eligible to participate in B.

To administer, supervise, and as well as disburse the scholarships for B, you have
entered into an agreement with D who is exempt under Section 501(c)(3).

Under the terms of the agreement, you will make annual grants to D. The grant amount
will be in the range of w dollars. Based on the initial funding, there will be G scholarships
in the amount of x dollars awarded for the first year. D has sole discretion to determine
the number and amount of individual scholarships awarded based on funds available. If B
is successful, you may increase its support.

Applications are required to be submitted on-line by using the application website and
portal developed, administered and owned by D. Besides the completed application,
complete transcripts of grades and a completed recommendation by a school counselor
or adviser, an instructor, or a work supervisor who knows them well must be submitted.

D is solely responsible for determining whether an applicant is eligible for B as well as is
solely responsible for reviewing the applications, for the selection of scholarship
recipients, including deciding whether to establish a selection committee, the
appointment and replacement of committee members, and the establishment of criteria
for committee membership. Your directors, officers, and employees as well as members
of the family and C related business entities and their directors, officers, and employees
are not permitted to participate in the selection process. In addition, C franchise owners
and restaurant operators are not permitted to participate in the selection process except
(i) to verify an applicant’s employment, and (ii) if requested by an applicant and qualified
to do so, to complete an evaluation form for an employee.

The criteria for selecting scholarship recipients is also established by D and scholarships
are awarded without regard to race, color, creed, religion, sexual orientation, age,
gender, disability, or national origin. Furthermore, the specific selection criteria consist of
the following:

1. Academic performance and honors earned,
2. Demonstrated leadership as well as participation in school and volunteer
   community activities,
3. Work experience,
4. Career and educational goals and objectives,
5. Unusual personal or family circumstances,
6. The strength of the recommendation provided.

D will send the award to the recipient, but the check will be payable to the school in which
the recipient is enrolled. Furthermore, the award is made in a single payment. If a student
withdraws from school while all or any part of the tuition is refundable, the school refunds
to D its pro rata share of the refundable amount. Recipients are also required to notify D
of any changes in address, school enrollment or other relevant information, and to
provide an official transcript when requested. Awards are not renewable but recipients
may reapply. D is responsible for maintaining all required records relating to individual
grants including information obtained to evaluate grantees. You will not have any access
to the information concerning the grants.

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 the provisions of 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).

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 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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T