Approves employer scholarship procedures

Plain-English summary

A private foundation requested advance approval for scholarships to employees of a company and their dependent children. It initially planned four awards for employees and two awards for dependents, with different redacted grant amounts. An unrelated administrator would have sole authority to select recipients using academic performance, leadership, activities, work experience, goals, and personal circumstances. The program did not restrict fields of study, did not condition continued eligibility on continued employment, and used relatively small awards intended for education rather than compensation. The IRS approved the procedures under section 4945(g)(1), subject to continued compliance with Revenue Procedure 76-47 and either its percentage tests or the relevant facts-and-circumstances test.

Ruling snapshot

• Question: Did the employer-related scholarship program satisfy section 4945(g) and the safeguards against disguised employee compensation?
• Outcome: Approved, assuming the program operates as represented and continues to satisfy Revenue Procedure 76-47.
• Key authorities: IRC §§ 117(a), 117(b), 170(b)(1)(A)(ii), 170(c)(2)(B), and 4945(g)(1); Rev. Proc. 76-47; Rev. Rul. 86-90

Full text (IRS public release)

[Redaction note: the IRS release blanks the foundation's identity, employer identification number, contact information, scholarship amounts, program name, employer, and independent administrator.]

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

Number: 201833031 Employer Identification Number:
Release Date: 8/17/2018
Contact person - ID number:

Contact telephone number:

Date: May 22, 2018

LEGEND UIL: 4945.04-04

v dollars = Amount
w dollars = Amount
X = Program

Y = Company
Z = 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

Your letter indicates you will operate an employer-related scholarship program called X.
The purpose of X is to establish and operate an educational scholarship program for the
employees of, and the dependents of the employees of, Y.

You initially plan to offer four scholarships in the amount of v dollars to eligible employees
of Y and two scholarships in the amount of w dollars to dependent children of eligible
employees of Y. You will determine by the end of each calendar year the number and

amount of grants to be made available for the following year based on a projected
budget.

Awards are not renewable; however, students may reapply to the program each year
they meet eligibility requirements.

The employees of Y will receive notice of X in the form of company press releases,
posters, and company emails.

The following criteria will be used to determine eligibility for X:

• Applicants must be full-time or part-time active employees of Y who have a
minimum of six months of service with the company as of the application deadline
date, or be dependent children, age 26 and under, of active Y employees (full-
time) who have a minimum of six months employment with the company as of the
application deadline date.

• Y employee applicants must be enrolled or be planning to be enrolled in at least a
part-time undergraduate or graduate course of study (with a minimum of six credit
hours) at an accredited two-year or four-year college or university, graduate
school, or a certificate from a vocational/technical school and working towards a
post-secondary degree.

• Applicants that are dependent children of employees of Y must be high school
seniors or current post-secondary undergraduate or graduate students who are
enrolled, or are planning to enroll, in a full-time or part-time undergraduate or
graduate course of study (with a minimum of six credit hours) at an accredited two
year or four-year college or university, graduate school, or a certificate from a
vocational/technical school.

• Dependent children of employees of Y are defined as biological, step, or legally
adopted children living in the employee’s household or primarily supported by the
employee, and are age 26 or under.

The X selection criteria will include consideration of academic performance,
demonstrated leadership, and participation in school and community activities, work
experience, a statement of career and educational goals and objectives, and unusual
personal or family circumstances.

You have engaged Z, an unrelated third party, to administer X. Z will evaluate
applications, select and notify winners, confirm school enrollment, and provide you with
management reports to summarize program activity and results. Z will have the sole
decision-making authority to evaluate scholarship applications and select award
recipients based on the above-mentioned criteria provided by you.

You plan to conduct your scholarship program in accordance with the guidelines of
Sections 4.01 through 4.07 of Revenue Procedure 76-47; however, you cannot
guarantee that your scholarship program will meet the percentage guidelines set out Rev.
Proc. 76-47 each year. You reasonably believe that your program will satisfy the 10
percent test of Section 4.08 each year but you have not determined whether the program
will in fact meet that test.

You will undertake reasonable efforts to secure sufficient applications to satisfy the 25
percent test of the Section 4.08 but you also anticipate that in some years the number of
eligible applications will be insufficient to satisfy the test. Due to the small number and
size of the scholarship program relative to the number of employees of Y, you have
determined that the expense that would needed to be incurred to determine whether you
met the percentage tests each year would be greatly out of proportion to the amount and
size of the scholarship program.

However, you firmly believe your scholarship program meets the “facts and
circumstances” test under Rev. Proc. 76-47 and is analogous to Rev. Rul. 86-90, where
the IRS ruled that that taxpayer’s grant program satisfied the “facts and circumstances”
test. The primary purpose of your scholarship program, X, is to educate recipients in their
individual capacities, and not to provide extra compensation or other employment
incentives to employees of Y. The following facts support you meeting the “facts and
circumstances” test:

(i) Independence of the Selection Committee: You have retained the services
of Z, an entirely independent party from Y, to serve as the selection
committee for the scholarship recipients.

(ii) Unrestricted Course of Study: The recipients of the scholarships are not
limited in any manner in the course of study they seek to pursue or the
institution they desire to pursue their course of study. The only
requirements are that recipients are enrolled, or are planning to enroll, in a
full-time or part-time undergraduate or graduate course of study (with a
minimum of six (6) credit hours) at an accredited two-year or four-year
college or university, graduate school, or a certificate from a
vocational/technical school.

(iii) Objective Selection Criteria: Through Z, recipients for scholarships will be
selected based on objective criteria, such as consideration of academic
performance, demonstrated leadership, participation in school and
community activities, work experience, a statement of career and
educational goals and objectives, unusual and interesting family
circumstances, and outside appraisals and recommendations.

(iv) Eligible Employees/Dependents: There are no specific groups of eligible
employees and there are no specific groups of employees that are
disqualified from receiving a scholarship. Further, continued employment is

not a pre-requisite for continued eligibility, provided that the recipient
received his or her award while he/she or his or her parent was employed
by Y.

(v) Size and Number of Scholarships: You plan to offer a small number of
scholarships and the amount of each grant is relatively small. This small
amount is unlikely to be seen as incentive compensation for the employees
of Y.

You represent that you will complete the following: (1) arrange to receive and review
grantee reports annually and upon completion of the purpose for which the grant was
awarded, (2) investigate diversion of funds from their intended purposes, (3) take all
reasonable and appropriate steps to recover the diverted funds, ensure other grant funds
held by the grantee are used for their intended purposes, and (4) 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 represent that you will maintain all records related to the following: (1) individual
grants including information to evaluate grantees, (2) grantees which are identified as a
disqualified person, (3) how the amount and purpose of each grant was established, and
(4) how you established supervision and investigation of the grants described above.

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 either the applicable percentage
tests described in section 4.08 of Revenue Procedure 76-47 or relevant facts and
circumstances, we will assume the grants are subject to the provisions of Code Section
117(a).

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 relevant facts and circumstances to ensure the primary purpose of

the program is not to provide extra compensation or other employment incentive
and the primary purpose is to educate recipients in their individual capacities.

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.

• Your selection criteria are based upon objective standards that are completely
unrelated to employment with Y.

• 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 either the applicable
percentage tests described in section 4.08 of Revenue Procedure 76-47 or
relevant facts and circumstances. If you establish another program covering the
same individuals, that program must also meet the percentage test or relevant
facts and circumstances.

• 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