Employer-related scholarship procedures received advance approval

Plain-English summary

A private foundation proposed scholarships for lineal descendants of employees of affiliated companies. An independent community committee would select recipients using academic, extracurricular, and financial-need criteria, with award numbers limited by the percentage tests for employer-related programs. The IRS approved the procedures under section 4945(g)(1), assuming the foundation operates the program as described. Grants used for qualified tuition and related expenses would not be taxable to recipients under section 117(b), and expenditures following the approved procedures would not be taxable expenditures by the foundation.

Ruling snapshot

• Question: Do the proposed employer-related scholarship procedures satisfy the advance-approval rules for individual grants?
• Outcome: approved, subject to continued compliance with the described procedures and percentage tests
• Key authorities: IRC §§ 117, 170, 4945(g); 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: 201932018
Release Date: 8/9/2019                       Employer Identification Number: [redacted]

Date: May 13, 2019
Contact person - ID number: [redacted]

Contact telephone number: [redacted]

LEGEND UIL: 4945.04-04

X= Scholarship Fund
H= Affiliated companies

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 X.

Your purpose is to make distributions for charitable and educational purposes within the
meaning of Section 501(c)(3) of the Internal Revenue Code.

The purpose of X is to provide educational scholarships to the lineal descendants of
employees of H by selecting qualified individuals to receive grants to advance their
education.

Lineal descendants include, but are not limited to, children, step-children, adopted
children and grandchildren of eligible employees of H. An eligible employee is one that
has completed one (1) year of continuous full-time service with H prior to the date the

Letter 4793 (10-2012)
Catalog Number 58264E

scholarship will be awarded. Eligibility is not based upon the employee's position (job
title) within H nor is it conditioned upon the employee’s continued employment with H.

All students who have graduated from high school and plan to attend an accredited post-
secondary educational institution are encouraged to apply for a scholarship. All students
are considered regardless of their sex, race, age, color, national origin, religion, marital
status, handicap, veteran status or parental status.

The post-secondary educational institution must be accredited by the North Central
Association of Colleges and Secondary Schools or an equivalent as determined by the
Scholarship Committee.

The Scholarship Committee consists of five community representatives who are separate
and independent from H.

The size of the scholarship award will be determined by the Scholarship Committee
based upon the annual employee contributions in the year preceding the deadline date
for applications.

The number of scholarship awards will be dependent upon the number of students who
are eligible or who apply for an award. In each year, the number of awards will not
exceed the lesser of: (i) twenty-five percent (25%) of the number of students who are
considered by the Scholarship Committee; or (ii) ten percent (10%) of the number of
individuals who can be shown to be eligible for the awards. If more than one scholarship
award is granted in a given year, each award will be in identical amounts.

In any year that the percentages tests are not met, awards will not be granted, and the
funds will accumulate for the following year.

Each award is granted for a one (1)-year period with possible renewals. Awards do not
automatically renew. Students must reapply every year. When reapplying, a student
recipient in a prior year will be considered eligible even if the student's Employee sponsor
is no longer employed by H.

X is communicated through Employees’ newsletters, mailings to Employees’ homes,
company bulletin boards, presentations at Employees’ meetings, inserts in Employees’
checks, news releases to the media, and any other reasonable form of communication.
In all communications, the scholarship will not be portrayed as an independent incentive,
a recruitment device or as additional Employee compensation.

Selection is based on financial need, scholarship, recommendations, test scores, class
ranking and extra-curricular involvement.

The application requests:

Letter 4793 (10-2012)
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1. A one-page essay detailing the applicant's high school years (or if re-applying,
post-secondary years) and activities, as well as plans for the future. The essay should
include extra-curricular activities such as school-related, community, sports, work and
or/religious involvement.

2. Copy of the applicant’s most recent Form 1040.
3. Copy of the applicant's college acceptance letter (graduating seniors).

4. Copy of the applicant's most recent high school or college grades, showing all
years attended.

5. Two (2) letters of recommendation - one from a teacher and one from an individual
who is not a teacher or a relative.

Applicants are rated based on:

Academic performance

Scholastic records

Grade point average

Extracurricular activities

Community activities

Financial need

Full-time status

Personal interview

Essay designed to show the applicant’s motivation, character, ability and potential

Students will provide the Scholarship Committee a progress report at the end of the first
quarter or semester of the academic year and at the end of the academic year. The
progress report must include a copy of the student’s grade card or transcripts for the
academic year and a short letter summarizing the student’s progress and the importance
of the award to the student’s academic progress. In renewing an award, the items
provided will be considered.

The Scholarship Committee shall maintain the following records for each scholarship grant
awarded:

a. Statement of the objective and non-discriminatory procedures used to select
recipients;
b. Adequate information regarding each applicant, including all information that the

Scholarship Committee secures to evaluate the qualifications of the applicant;
c. Identification of the applicant;

d. Specification of the award amount and demonstration of the IRC § 117 purposes for
which the award was used (qualified tuition and related expenses);

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e. Verification of the appropriate publication of the scholarship award program and
results; and

f. Information which the Scholarship Committee obtains regarding follow-up
investigation, including follow-up reports required from all recipients.

Scholarship funds will be disbursed to the educational institution which the award
recipient is attending.

The Scholarship Committee will investigate any misuse of funds and withhold further
payments to the extent possible if the Scholarship Committee does not receive a required
report, or if reports or other information indicate that grant proceeds are not being used
for the purpose for which the grants were made. The Scholarship Committee will take all
reasonable and necessary steps to recover grant funds, or to ensure restoration of the
funds and their dedication to the purposes the grant funds are financing.

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 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

Letter 4793 (10-2012)
Catalog Number 58264E

• 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

Letter 4793 (10-2012)
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• You cannot award grants to your creators, officers, directors, trustees, foundation
managers, or members of selection committees or their relatives.

e 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).

e 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 4793 (10-2012)
Catalog Number 58264E