Employer-related scholarships approved

Plain-English summary

A private foundation proposed scholarships for children and grandchildren of employees of a corporation and its affiliates. Eligible applicants would be recent high school graduates or current undergraduates, and awards would consider academics, leadership, activities, work experience, an essay, and possibly financial need without regard to the employee's title or the student's field of study. An independent administrator and independent selection committee would run the program, insiders and their relatives would be excluded, and awards would not end merely because the related employee left the company. The foundation represented that it would satisfy Revenue Procedure 76-47's conditions and applicable 25-percent or 10-percent limits for employer-related scholarships. The IRS approved the procedures under section 4945(g)(1).

Ruling snapshot

• Question: Did the foundation's employer-related scholarship procedures satisfy the advance-approval rules?
• Outcome: Approved, while the program continues to satisfy Revenue Procedure 76-47.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)(1); Rev. Proc. 76-47.

Full text (IRS public release)

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

Number: 201947016
Release Date: 11/22/2019 Employer Identification Number:

Contact person - ID number:
Date: August 26, 2019
Contact telephone number:

LEGEND: UIL:

X = corporation 4945.04-04
y = number

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

You will operate an employer-related scholarship program for children of employees of X
and its affiliated companies. Your focus with this program will be on awarding qualified
scholarships to be used for study at educational organizations described in Section
170(b)(1)(A)(ii) of the Code.

You do not intend to award educational loans or involve any loan institutions in your
program.

The program will be primarily publicized through direct communication to X employees,
such as emails, direct mailing, and notifications on the intra-company website.

Letter 4793 (10-2012)
Catalog Number 58264E

A student will be eligible to apply for a scholarship if they are a:

• Dependent child or grandchild, age 26 and under, of part-time or full-time
employees of X who have a minimum of one year of employment with X as of the
application deadline.

• Graduating high school senior who will attend an accredited post-secondary
institution of higher learning, including accredited two-year or vocational-technical
programs. Or, alternatively, the student is a current post-secondary undergraduate
attending, or with plans to attend an accredited post-secondary institution of higher
learning, including accredited two-year or vocational-technical programs

There will be no limitations or restrictions in the selection procedures based upon race,
religion, national or ethnic origin, or other illegally discriminatory criteria.

You anticipate that scholarships will be awarded to applicants based on high school
academic performance; demonstrated leadership; participation in school and community
activities; work experience; and possibly financial need. Additionally, applicants will be
asked to write a short essay on their academic or professional aspirations and how the
scholarship will help them achieve those goals.

In awarding the scholarship, you will not take into consideration the applicant's potential
field or study, nor will you take into consideration the employment title or position of the
applicant’s family member in X or any affiliate. All recipients are free to use the
scholarship to pursue any course of study and will not be limited to courses of study that
are of particular benefit to X. The terms of the scholarship will not include any
commitment, understanding, or obligation suggesting that the recipient's studies are
undertaken for the benefit of you or X.

You shall determine the number of scholarships awarded based on the amount of
available funds and on the quality of applicants. Initially, you expect to award
approximately y scholarships per year. The number of scholarships to be awarded each
year may be reduced in the event the selection committee does not receive sufficient
qualified applicants.

In all cases, you will meet the requirements of Section 4.03 of Revenue Procedure 76-47
and will adjust the number of scholarships to meet these requirements.

The scholarship amounts will be determined based upon the needs and qualifications of
the applicants.

After a scholarship is awarded, the recipient will have to show proof of enrollment in an
accredited educational institution before the scholarship amount is paid. It is anticipated
that this requirement will generally be met by entering into an agreement with the
recipient’s educational organization such that the scholarship funds will be paid to the

Letter 4793 (10-2012)
Catalog Number 58264E

college or university and that the funds may only subsequently be used for qualified
education expenses.

You have not yet determined if the scholarship awards will be renewable, or only single
year grants. If you decide to make the scholarship renewable, in order to qualify for a
renewal a recipient will have to submit a report showing that they remain in good standing
with their educational organization and show proof of enrollment for the next academic
term. You will not renew a scholarship if you have information that the original
scholarship was used for any other purpose than qualified educational expenses; that the
recipient engaged in any misconduct; or the recipient fails to maintain a satisfactory
academic record.

In all cases, once a scholarship is awarded, it may not be terminated, and any renewals
may not be denied, because the recipient's parent terminates employment with X,
regardless of the reason for the termination of employment.

In all cases you will use an independent administrator to both select the scholarship
recipients and to administer your scholarship program. The administrator will provide an
independent selection committee with considerable experience of selecting scholarship
recipients. The members of the selection committee will have no other connection to you,
X, or any of its affiliates.

Relatives of the selection committee will not be eligible for awards under your scholarship
program. Additionally, no relatives of your officers, directors, or substantial contributors
will be eligible for the scholarship program. In all cases, no grants will be awarded to
individuals who are disqualified with respect to you.

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 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 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.

Letter 4793 (10-2012)
Catalog Number 58264E

• 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.

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:

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• 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.

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