Advance approval of an employer-related scholarship program

Plain-English summary

A private foundation, funded by the founder of a for-profit corporation and his wife, asked the IRS to approve in advance the way it will run an employer-related scholarship program. This approval matters because private foundations owe an excise tax on "taxable expenditures," and a grant to an individual for study is taxable unless the IRS has pre-approved the award procedures under Section 4945(g). The foundation's program offers renewable scholarships (initially mostly to employees and former employees of the company and their families, later opening to unaffiliated students) chosen by an independent selection committee using academic merit, leadership, recommendations, and financial need. Crucially, it committed to the percentage limits of Rev. Proc. 76-47 that keep an employer-tied scholarship from being disguised compensation: no more than 25% (or 10%) of eligible employee children, and no more than 10% of eligible employees, may receive grants. The IRS approved the procedures, finding they meet Section 4945(g)(1). As a result, grants made under them are not taxable expenditures, and the scholarships are tax-free to recipients used for qualified tuition under Section 117. Company foundations running scholarship programs for employees' families would care: this is the pre-clearance that keeps the grants from triggering excise tax or looking like wages.

Ruling snapshot

• Question: Do the foundation's employer-related scholarship award procedures qualify for advance approval under Section 4945(g)(1)?
• Outcome: approved
• Key authorities: IRC § 4945(g)(1); IRC § 117(a), (b); IRC § 170(b)(1)(A)(ii); 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

Release Number: 201838010
Release Date: 9/21/2018 Employer Identification Number:
Date: June 28, 2018

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
B = Program

C = Corporation

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.
You plan to offer B to deserving students both abroad and in the United States to
continue their education.

Your chairman is the founder of C, a for-profit corporation. Along with his wife, they are
funding this program. The fund provides scholarships for deserving students, including
current and former employees of C and their families. Substantial contributors, your

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managers, officers, directors, as well as their family members, are ineligible to participate
in the program.

You plan to award ten scholarships in amounts up to x dollars each. You hope to scale
up to twenty or more scholarships per year, depending on the availability of funding, the
particular needs of each recipient, and the overall success of the program. B is
advertised through C's website and through foreign and international websites that have
a potential of drawing a wide audience.

An application must be submitted. Individuals eligible must attend a top 100 college or
university. The applicant must have a distinguished academic record and demonstrate
the ability to serve as a leader in his or her community. Three letters of recommendation
must be submitted and financial need will be considered. An essay must be submitted
regarding personal goals and interests in leadership development. Your scholarship
committee uses a detailed rubric to rate the applicants.

The scholarships are renewable. To seek renewal, an application must be submitted and
the applicant must (1) show the use of monies awarded, (2) maintain full-time university
or college enrollment, (3) maintain a minimum 3.0 GPA (or its foreign equivalent), and (4)
demonstrate leadership development.

The number of grants will be determined annually by your board. It will depend on the
number of applicants and your philanthropic priorities. You have not yet granted any
scholarships and you are still in the process of finalizing your selection committee.

You represent that in the beginning, recipients will most likely be limited to employees or
former employees of C and their families. While C may provide funding for the program,
C is not a disqualified person with relation to you. Neither C nor executives of C will
control how the scholarship program is operated. C will not be able to use B as an
inducement to their employees to continue employment.

It is expected that the number of scholarship recipients who are children of employees
working for C shall not exceed either (1) 25 percent of the number of employee families
who (i) were eligible, (ii) applied for such grants, and (iii) were considered by the selection
committee in selecting the recipients, or (2) 10 percent or the number of employee
families who can be shown to be eligible for grants (whether or not they submitted an
application) in that year. Similarly, you expect that the number of awards to C's
employees will not exceed 10 percent of the number of employees who, (i) were eligible,
(ii) were applicants for such grants, and (iii) were considered by the selection committee
in selecting the recipients of the grants in that year. In the future, as the program grows, it
is expected that scholarships will be available for deserving students that are not affiliated
with C.

You represent that one of your founders will serve on the selection committee along with
three members of a local charity and a family friend who has no business relationship
with the founders, you, or C. Representatives of C will not be included on the selection

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committee. As the scholarship program grows, it is expected that scholarships will be
available for deserving students that are not affiliated with C. You have no plans to limit
the scholarships to C employees or their children. The scholarships are also available to
former employees of C and their children thereby eliminating the potential for any
disguised compensation to current employees of C. C does not and will not use the
scholarship program as a recruiting tool for potential employees since it has no control
over the selection of scholarship recipients and scholarships are available to students
pursuing any degree (ranging from mathematics to the arts) at a top university or college.

You will check the OFAC List of Specially Designated Nationals and Blocked Persons for
names of individuals and entities with whom you are dealing to determine if they are
included on the list. You will comply with all statutes, executive orders, and regulations
that restrict or prohibit persons from engaging in transactions and dealings with
designated countries, entities, or individuals, or otherwise engaging in activities in
violation of economic sanctions administered by OFAC. If necessary, you will acquire
from OFAC the appropriate license and registration where necessary.

You represent 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 a
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: (1) maintain all records relating to individual grants including
information obtained to evaluate grantees, (2) identify whether a grantee is a disqualified
person, (3) establish the amount and purposes of each grant, and (4) establish that you
undertook the supervision and investigation of 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

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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.

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.

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• 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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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