Employer-related scholarship procedures approved

Plain-English summary

A private foundation proposed scholarships for children of employees of five public-service and other employers. Recipients would be selected on merit through applications, references, and interviews, with committee members recusing themselves from applicants connected to their employer groups or families. Awards could continue for up to eight semesters if recipients submitted transcripts and activity reports and maintained the required grade-point average. The foundation represented that the program would satisfy the percentage limits and independence requirements for employer-related scholarships in Revenue Procedure 76-47. The IRS approved the procedures under section 4945(g)(1), and said qualifying awards used for tuition and related expenses would not be taxable to recipients under section 117.

Ruling snapshot

• Question: Do the foundation's employer-related scholarship procedures meet the advance-approval rules for grants to individuals?
• Outcome: approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), and 4946(a); Rev. Procs. 76-47 and 85-51

Full text (IRS public release)

Transcriber's note: this document is a five-page scan. Obvious OCR errors in bullets, spacing, and form labels were corrected by comparison with every page image. Redacted identifying fields and a redacted percentage are marked [redacted]. Original grammatical irregularities are preserved. The wording is otherwise preserved verbatim.

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

Release Number: 202002019
Release Date: 1/10/2020 Employer Identification Number: [redacted]
Date: October 16, 2019

Contact person - ID number: [redacted]

Contact telephone number: [redacted]

LEGEND UIL: 4945.04-04

B = Scholarship

C = City

D = City

E = School board
F = Organization

g dollars = Amount
h 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 B
for high school graduates.

Letter 4793 (10-2012)
Catalog Number 58264E

The pool of eligible applicants are the children of individuals employed by five different
employers: C police department, C fire department, D public schools, the E school board
and F.

The amount of the grant is g dollars per semester for a total of h dollars per year. The
funds are to be used to pay for tuition, fees, books or room and board.

Scholarship information is made available on your website and leaders within the
targeted areas are also notified once the application window has opened. Also, the points
of contact for each employer group will email the application to all personnel at a
minimum. Some also make announcements in meetings or distribute through an internal
message board that all personnel can view.

B will be awarded on basis of merit as demonstrated by grades, test scores, school, and
community service. Additionally, the selection committee conducts interviews with
finalists for the awards. Financial need is not considered in the application process.

The number of recipients is decided by you based on the number of qualified candidates,
however, typically one scholarship is awarded per employer. You attest that you will
award scholarships to [redacted] percent or fewer of the eligible applicants who were actually
considered by your selection committee.

Selection will be made by a selection committee on the basis of information provided in
the application, references given, and a subsequent personal interview of finalists. The
selection committee consists of a chairman, assistant chairman, and representatives from
the employers from each category, expect F, which has two representatives. The
selection committee member(s) associated with an applications employer group will
recuse themselves during the interviewing, discussion and consideration of that
applicant. The grants are awarded solely in the order recommended by the selection
committee.

The payment is made to the recipient at the beginning of each semester for a maximum
of eight semesters. Payment is not made until a transcript and brief report of activities
from the previous semester is submitted. If the recipient leaves the college or university
or fails to maintain a 2.75 grade point average, the scholarship agreement is terminated.

There are no specific prohibitions against relatives of members of the scholarship
selection committee receiving scholarships. However, they must meet all eligibility and
application requirements to be selected. Imposing the same application and selection
criteria to family members as for other non-related applicants ensures fairness.
Abstention from the voting/selection process by the related scholarship selection
committee member is another step in avoiding impropriety in the selection process. The
selection committee is merely an advisory committee. You are responsible for any final
discretion on awarding the scholarships to the recipients. You do not provide any
scholarships to any disqualified persons as defined by Section 4946(a) of the Code.

Letter 4793 (10-2012)
Catalog Number 58264E

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 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.

• 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

Letter 4793 (10-2012)
Catalog Number 58264E

• 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.

Letter 4793 (10-2012)
Catalog Number 58264E

• 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

Letter 4793 (10-2012)
Catalog Number 58264E