National finalist scholarship for employees' children received approval

Plain-English summary

A private foundation proposed four-year college scholarships for up to two children of employees of a related company. Recipients first had to become finalists in an independent nonprofit organization's nationwide academic competition, an outcome the letter described as extremely unlikely based on redacted participation figures. The independent organization administered the competition and awards, while scholarships were paid directly to eligible colleges or universities and required full-time enrollment, good academic standing, and study toward a traditional bachelor's degree. The program could not be used to recruit employees, prior recipients remained eligible regardless of a parent's employment, and the selection criteria were unrelated to employment. The IRS approved the procedures under section 4945(g)(1) based on the program's facts and circumstances and its compliance with Revenue Procedure 76-47.

Ruling snapshot

• Question: Did the employer-related scholarship program for children who reached finalist status in a national competition satisfy section 4945(g)(1)?
• Outcome: Approved, assuming the program continues as proposed and satisfies the applicable percentage test or facts-and-circumstances standard.
• Key authorities: IRC §§ 117, 170, and 4945(g)(1); Rev. Proc. 76-47

Full text (IRS public release)

Transcriber's note: this document is a five-page scan. Obvious OCR errors in bullet symbols, page artifacts, redacted blank spaces, and form layout were corrected by comparison with every page image. Original grammatical and typographical irregularities are preserved. The wording is otherwise verbatim.

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

Release Number: 201928017
Release Date: 7/12/2019 Employer Identification Number: [redacted]
Date: April 18, 2019

Contact person - ID number: [redacted]

Contact telephone number: [redacted]

LEGEND UIL: 4945.04-04

B = Company

C = Organization
D = Scholarship

x dollars = Amount

Dear [redacted]:

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 D.
You sponsor D for children of employees of B. D is a four-year college scholarship for up
to two eligible students, x dollars per year, for up to four years of undergraduate study.

To be eligible for D, the individual must be a child of an employee of B and must also
meet the requirements for participation in the C’s scholarship program. C is an
independent, not-for-profit organization. The annual competition, criteria, selection of

winners, and the administration of their awards are handled by C. C will inform you
annually about the progress of the recipients.

Students enter C’s nationwide scholarship competition by taking a test. The purpose of
the program is to identify and recognize high-performing students and encourage them to
pursue rigorous college studies. [redacted] students from [redacted] high schools
around the country participate in the competition annually. Those students scoring within
the top one-half of one percent on a state-by-state basis (approximately [redacted]) are
designated as Semifinalists. The Semifinalists may advance to the Finalist level by
confirming their scores on a second test, and by submitting an application that includes a
high school record (provided by their high school officials) showing strong academic
performance, a personal essay, extra-curricular accomplishments and the
recommendation of their high school principal or school official designated by the
principal. There will be about [redacted] students that advance to the Finalist status.

Finalists [redacted] and eligible to receive the awards. Accordingly, the chance that any student
entering the competition will become a Finalist is less than [redacted]%. Each of these facts
shows that your scholarships comply with the facts and circumstances test under Section
4 of Revenue Procedure 76-47, because the probability of attaining Finalist level is
extremely low.

The formal offer of your scholarship that C sends to each winner specifies the terms for
acceptance of the award. The winners must enter college in the fall term following
selection and must enroll as a full-time undergraduate in a college or university in the
United States that holds accredited status with a regional accrediting commission on
higher education. Scholarship stipends are not payable for attendance at service
academies, virtual universities, and certain institutions that are limited in their purposes or
training.

The scholarships are paid directly to the college or university final aid office. C obtains
information from the college or university regarding the recipients’ status as a student in
good standing. If there is evidence of misuse of the scholarship funds, C will follow up
with the college or university and the recipients to investigate.

Neither you nor B will use the scholarships as a means of inducement to recruit
employees. The selection committee is comprised of the staff of C, who are experienced
in the selection of scholarship recipients. The individuals on the selection committee are
experienced in the education and scholarship fields and are totally independent and
separate from you, B, and C.

The courses of student for which grants are available are not limited so long as the
recipient is in any course of study leading to one of the traditional baccalaureate degrees.
The only continued obligation on the part of the recipients is to remain enrolled during the
day in a course of study leading to one of the traditional baccalaureate degrees, and
remain in good academic and disciplinary standing.

You represent that you will (1) arrange to receive and review grantee reports annually
and upon completion of the purpose for which the grant was awarded, (2) investigate
diversions of funds from their intended purposes, and (3) take all reasonable and
appropriate steps to recover diverted funds, ensure other grant funds held by a grantee
are used for their intended purposes, and 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.

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 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.

• You will make prior recipients automatically eligible without regard to any
employment status.

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

• 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