IRS approved community and employer-related scholarships

Plain-English summary

A private foundation proposed one scholarship program for graduates of a local school system and another for children of employees of two companies. Separate advisory committees would evaluate applicants using academic performance, school involvement, financial need, essays, and recommendations, while the trustee retained final award authority. The employer-related program used an independent committee, did not tie awards to continued employment or employer-benefiting study, and generally limited awards to 25 percent of eligible applicants under Revenue Procedure 76-47. Both programs allowed limited renewals, paid schools directly, and required reporting, recovery of diverted funds, and recordkeeping. The IRS approved both sets of objective and nondiscriminatory procedures under section 4945(g)(1).

Ruling snapshot

• Question: Do the foundation's community and employer-related scholarship procedures satisfy section 4945(g)?
• Outcome: approved, assuming both programs are conducted as proposed
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g), and 4946; Rev. Procs. 76-47 and 80-39

Full text (IRS public release)

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

Number: 201935014
Employer Identification Number:

Release Date: 8/30/2019
Contact person - ID number:

Date: June 6, 2019
Contact telephone number:
LEGEND

UIL: 4945.04-04

B = School

C = Name

D = Employer

E = Employer

F = Organization

X = Name

Y = Name

Dear                    :

You asked for advance approval of your 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 programs to fund the education of certain qualifying
students.

Our determination

We approved your procedures for awarding scholarships and your procedures for
awarding employer-related scholarships. Based on the information you submitted, and
assuming you will conduct your programs as proposed, we determined that your
procedures for awarding 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 a scholarship program called X and an employer
related scholarship program called Y to be used by the recipients for undergraduate
degrees and/or post high school technical schools with a strong educational component.
The amount and number of scholarships awarded each year will vary depending on the
amount of funds available to be distributed. In addition, award amounts for X and Y will
be limited to only tuition as well as limited to a maximum payment of the tuition amount

then charged by B. Furthermore, your trustee in its sole discretion, has the authority to
allocate the percentage of the distributable amount each year between X and Y.

Concerning the selection committees for X and Y, there will be a separate committee for
each program known as the Scholarship Advisory Committee. The Scholarship Advisory
Committees do not communicate with each other regarding recommendations for
scholarships and no member of one Scholarship Advisory Committee will serve as a
member of the other Scholarship Advisory Committee.

You will award all scholarships under X and Y on an objective and non-discriminatory
basis, with neither race, creed, color, sex, age, religion, national origin nor disability being
considered. No scholarship may be awarded to any disqualified person as defined in
Code 4946 and no relative of the grantor will be a prospective recipient of any
scholarship program.

Details of X

The purpose of X is to provide scholarships to high school graduates of C school system
to attend a university or college selected by the recipient. High school graduates of C
school system who demonstrate academic ability (limited to those students ranking in the
upper fifty percent of the graduating class) and show active participation in school
activities as well as show financial need are eligible to apply.

To promote X, administrators of C school system will prepare announcements,
advertisements, solicitation materials and applications for distribution to the students
directly through the high school. All eligible students must complete and timely submit an
application including necessary attachments such as relevant financial information and
Official transcripts.

The applications will then be reviewed by the Scholarship Advisory Committee. The
committee is composed of at least one school administrator, principal or vice- principal,
guidance counselor, community leader and/or teacher. In the event one or more
committee members resign, the remaining committee members and/or your trustee will
select a qualified replacement.

After reviewing the applications, the Scholarship Advisory Committee is responsible for
ranking the applicants based on the applicants’ GPA, financial need and participation in
school activities. The Scholarship Advisory Committee provides the names of those
recommended to your Trustee who makes the final determination as to the number and
amounts of scholarships awarded.

In addition, the scholarships under X are renewable for up to three years or until a
bachelor’s degree is obtained, whichever is earlier as long as the student maintains a
GPA of 2.0 on a 4.0 scale and maintains a record of good standing at the college or
university. Furthermore, to renew the scholarship, prior year recipients must submit a
renewal application along with their most recent transcript or grade report to be
considered. The Scholarship Advisory Committee then reviews the renewal applications

and makes recommendations to your Trustee. Your Trustee then makes the final
determination as to the number of renewal scholarships and the amount awarded for
each renewal scholarship.

Details of Y
The purpose of Y is to provide scholarships to children of employees of D and E to attend
a university or college selected by the recipient. To be eligible, students must:

• Be children of employees of D or E;
• Be high school graduates;

• Demonstrate academic ability (limited to those students ranking in the upper fifty
percent of the graduating class);

• Have participated in school activities.

To promote Y, advertising materials will be provided to the headquarters of D and E to
solicit qualified students. D also advertises Y in a monthly newsletter while E advertises
Y through company-wide announcements, memoranda and solicitation materials for
distribution to the employees directly at the company. To apply for Y, eligible students
must complete an application and timely submit it to you with all required attachments
including their official transcript, an essay on their goals and a character recommendation
from a teacher, school principal or employer.

To help administer Y, your trustee is contracting with F. F is responsible for the provision
of the Scholarship Advisory Committee, which currently consists of members with several
years’ experience selecting qualified recipients of various scholarship programs.

Moreover, if one or more of the current committee members resign or are removed, there
will be a qualified replacement by F. If your trustee removes or replaces F, your trustee
will select a replacement Scholarship Advisory Committee to serve as the Scholarship
Advisory Committee for Y.

Members of the Scholarship Advisory Committee for Y will review the scholarship
applications and then rank the applicants based on applicants’ GPA, their essay, the
strength of their character reference and their participation in school activities. The
committee will then forward the recommendations to your trustee for final review. Your
trustee makes the final determination as to the amount and number of scholarships
awarded for Y. Decisions of your trustee are final and justification for recipients will not be
disclosed under any circumstances.

Further in compliance with Revenue Procedure 76-47, the Scholarship Advisory
Committee:

• Will consider only those children who meet applicable minimum standards for
admission to colleges and universities;

• Will select recipients based solely on substantial and identifiable objective
standards completely unrelated to employment;


• Will not terminate any scholarship because the parent’s employment has
terminated;

• Will not condition the scholarship on the recipient choosing a course of study
benefiting the parent’s employer;

• Will not use the scholarship to recruit employees or induce their retention;

• Will ensure the awarding of the scholarship remains consistent with the overall

disinterested purpose of enabling a recipient to obtain an education solely for the

recipient’s benefit.

In addition, the number of scholarships under Y awarded to employees’ children in any
year will be limited to 25% or less of the total number of employees’ children who were
eligible for grants, were applicants for the grants, and were considered by the
Scholarship Advisory Committee for grants as provided by Revenue Procedures 76-47
and 80-39.

For any year in which the 25% test cannot be satisfied, potentially due to not enough
applicants applying for Y to have at least one award under the 25% test, your trustee has
the discretion to re-allocate the percentage of the distributable amount in any given year
between Y and X. In this situation, your trustee will re-allocate the percentage of the
distributable amount such that no more than one scholarship is awarded to a recipient
under Y regardless of the number of applications received. This scenario meets facts and
circumstances because limiting it to one under these conditions indicates this is not an
inducement or fringe benefit nor will this benefit the employers in any fashion.

Scholarships under Y may be renewable for up to three years, or until a bachelor’s
degree is obtained, whichever is earlier. To be considered for renewal of their
scholarship, prior year recipients must submit a renewal application along with their most
recent transcript or grade report. Scholarships are renewable if the applicant maintains a
G.P.A. of 2.0 on a 4.0 scale as well as maintains a record of good standing at the college
or university in which the recipient is attending. The Scholarship Advisory Committee
reviews the renewal applicants and makes a recommendation to your Trustee regarding
the amount that should be awarded to each renewal applicant. Your Trustee in its
discretion then makes the final determination as to the number of renewal scholarships
and the amount awarded for each renewal scholarship.

Controls for both X and Y
Your trustee pays the scholarship proceeds for both X and Y directly to the
university/college the recipient is attending. Your trustee also provides a letter to each
university/college specifying that their acceptance of the funds constitutes their
agreement to (i) refund any unused portion of the scholarship if a scholarship recipient
fails to meet any term or condition of the scholarship; and (ii) notify your trustee if the
scholarship recipient fails to meet any term or condition of the scholarship. If the
university/school will not agree to such terms, your trustee will obtain the needed reports
and grade transcripts from the scholarship recipient.

You represent that you will arrange to receive and review grantee reports annually and
upon completion of the purpose for which the grant was awarded, investigate diversions
of funds from their intended purposes, and 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 relating to individual grants, including
information obtained to evaluate grantees, identify whether a grantee is a disqualified
person, establish the amount and purpose of each grant, and establish that you
undertook the supervision and investigation of 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 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 the provisions of 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 Y will generally meet the requirements the 25 percent percentage
test in Revenue Procedure 76-47. This test requires 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. For any year in which the 25% test cannot be
satisfied, potentially due to not enough applicants applying for Y to have at least one
award under the 25% test, your trustee has the discretion to re-allocate the percentage of
the distributable amount in any given year between Y and X. In this situation, your
trustee will re-allocate the percentage of the distributable amount such that no more than
one scholarship is awarded to a recipient under Y regardless of the number of
applications received. This scenario meets facts and circumstances because limiting it to

one under these conditions indicates this is not an inducement or fringe benefit nor will
this benefit the employers in any fashion.

You further represented that your procedures for awarding grants under Y will meet the
requirements of Revenue Procedure 76-47:

• 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 programs 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 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.

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