Employer-related scholarship procedures approved for a private foundation

Plain-English summary

A private foundation asked the IRS to approve an employer-related scholarship program for employees' dependent children. An independent third-party administrator will publicize the program, process applications, select recipients through a committee unaffiliated with the employer, verify enrollment and academic progress, and maintain case histories. Awards will be based on objective merit criteria and financial need, and the number of awards will be limited to no more than 25 percent of the eligible applicants considered each year. Employer and foundation insiders will not control the selections, though their children may apply under the same independently administered process. The IRS approved the procedures under IRC § 4945(g)(1), subject to continued compliance with Revenue Procedure 76-47 and its percentage tests. Qualified awards may be excluded from recipients' income under IRC § 117, and the approval is effective October 2, 2017.

Ruling snapshot

• Question: Do the foundation's employer-related scholarship procedures satisfy the advance-approval requirements for grants to individuals?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1); 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: 201902033
Release Date: 1/11/2019
Employer Identification Number:
Date: October 16, 2018
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

B= Name

C= Employer

D= Number

E= Date

F= Organization

x dollars= Amount
y 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 the employees of C.

The purpose of B is to provide scholarships to fund qualified educational expenses for
dependent children (biological, legally, adopted, step-child, etc.) of C’s employees. The
terms of the scholarship and courses of study for which scholarships are awarded must
meet all applicable requirements of Section 117 of the Internal Revenue Code, as
amended, and the regulations thereunder, and any other applicable revenue laws

Your current intention is to annually award renewable scholarships of x dollars and non-
renewable scholarships of y dollars to top ranking students entering or continuing in a
bona fide degree program at an accredited institution. These amounts may change
depending upon available funds and/or the number of applicants.

You are contracting with F who is a third party to independently administer B, including
the application and selection process as well as verification of the usage of funds and
attendance at accredited institutions. Both C’s and your directors, officers, employees do
not have influence on the decision of which applicants are awarded scholarships.

You will insure that B is publicized through C’s corporate communications media
including C’s weekly electronic newsletter and on C’s intranet. C’s intranet page will
include overview documents describing B and an application request form which will be
available in multiple languages. F may also have information about B on its website.

To be eligible, applicants must be:

• A dependent child of an employee of C who is under the age of D as of E in the
award year for which he or she seeks an award.

• A high-school senior planning to pursue full-time study at an accredited institution
offering a two-year or four-year degree program (or equivalent outside the U.S.)
or a student with at least one semester of studies remaining until graduation who
is currently enrolled full-time in an accredited institution offering a two year or four-
year degree. .

To apply for a scholarship, interested applicants must email a completed application
request form demonstrating their eligibility to F by a specific due date. Upon receipt of
the application request form, F will send eligible applicants a link to your online
Scholarship Application form. Eligible applicants must submit your standard application
form, academic transcripts, a personal essay describing their study plans, your financial
need disclosure form, and letters of reference.

All applications will be reviewed by an independent selection committee comprised solely
of employees of F not affiliated with C. The selection committee will discuss the merits

of each application and then evaluate, ranks and then choose the finalists and alternates
for the awards based on objective, non-discriminatory, merit-based criteria including:

• Academic ability and achievements, including class rank and grade
point average,
• Extra-Curricular activities,


• Strength of the applicant’s statement of study plans and reference
letter, and
• Demonstrated leadership and community service.

Finalists and alternates are also reviewed for financial need based on a financial need
form submitted with each application

The selection committee will award the scholarships to the top applicants, with a
percentage of scholarships awarded to the top candidates who demonstrate financial
need based on information submitted with the application package.

No directors, officers or employees of C will serve on this committee or otherwise
influence it or be involved in determination of its composition. Members of the selection
committee will not be able to receive a private benefit, directly or indirectly, if certain
potential recipients are selected over others. As to officers, directors, or substantial
contributors being eligible for awards under the program, their children will be eligible,
however, measures are in place to ensure that all scholarship awards are made without
any bias because F, a third party independent administrator manages the entire program,
including application intake and review, selection of recipients, and oversight of use of
scholarship funds.

The selection committee is the sole determiner of the number of scholarships awarded
annually. The number of scholarships awarded will vary annually depending upon how
many applications are received, however, the number of awards shall be limited to no
more than 25% of the eligible student applicant considered in each year. Once the
selection committee has made its recommendation as to the number of scholarships to
be awarded in a year, no one else has authority to increase that number.

All recipients are required to sign and submit a Terms of Agreement document to F
agreeing to certain requirements and obligations before receiving the scholarship.

In addition, the procedures for supervising the scholarships include that the recipients
submit the following to F: 1) a completed proof of enrollment form (with acceptable proof
of enrollment attached, including : a letter of verification from the academic institution, a
copy of the a receipt acknowledging receipt of tuition by the institution, and a copy of the
recipient's official class schedule), 2) an annual academic progress report (to be
completed, in part, and signed by the recipient's Academic Adviser from his or her
enrolled institution) for renewals, and 3) an official grade report or transcript (or suitable
alternative from an academic adviser) reflecting academic progress. Scholarships may
terminate or be suspended for noncompliance with program requirement, violation of
laws’ regulation, failure to maintain satisfactory scholastic standing or to complete
assigned university courses or other work required of a scholar, material changes in
program of study without approval, engaging in unauthorized income-producing activity,
misrepresentation in application or related program forms, and other actions considered
detrimental to the program. Recipients are also obligated to notify F in the event of
discontinuing studies.

F will maintain case histories with the supporting documentation for the recipients of
scholarships, including their names, addresses, purposes of the awards, amounts,
manner of selection and any applicable relationships to C and/or any relationships to an
officer, trustee, director or donor.

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.

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 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.

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.


• 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.

• The effective date for this approval is October 2, 2017.
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