IRS approves community and employee-child scholarships

Plain-English summary

A private foundation proposed one scholarship program for graduating seniors in a local area and another for children of a company's full-time employees. Both programs would use academic achievement, extracurricular and community involvement, and an essay as selection criteria. An independent committee of college faculty would choose recipients without knowing an employee parent's name or position, and the awards would be paid directly to schools. The foundation represented that the employee-related program's primary purpose was education, not compensation or an employment incentive, and that it would satisfy Revenue Procedure 76-47's facts-and-circumstances test. The IRS approved both programs under section 4945(g)(1) and stated that awards used for qualified tuition and related expenses would not be taxable to recipients under section 117.

Ruling snapshot

• Question: Do the community and employer-related scholarship procedures qualify for advance approval?
• Outcome: approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 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

Release Number:202010005
Release Date: 3/6/2020 Employer Identification Number:

Date: December 12, 2019
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
T = Number
U = City, State

V = Scholarship

W = Scholarship

X = Company

y dollars = Amount
z dollars = Amount

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 both scholarships and 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 both
scholarships and 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 a scholarship program called V and an employer-
related scholarship program called W. The purpose for both W and V is to provide
academic scholarships for graduating seniors who will attend a college, university, or

Letter 4793 (10-2012)
Catalog Number 58264E

trade school. The number of scholarships is determined based on the available funds and
determined prior to sending out announcements or applications.

V is available to graduating seniors in the U area that will be attending a college,
university, or trade school. The recipients are nominated by their high school principal or
counselor. Each recipient of this scholarship is eligible for y dollars. Information regarding
this scholarship is mailed to area high school principals.

The purpose of W is to provide scholarships to children of full-time employees of X that
are graduating from high school and will be attending a college, university, or trade
school. These scholarships will be awarded annually and only available to graduating
seniors that are a son or daughter of a full-time employee of X. The amount of W is z
dollars. Notices regarding this scholarship are posted in the office and listed on the
employee website portal. To apply for the scholarship, applications along with a transcript
and photo identification, should be mailed to X by the deadline listed on the application.

The criteria for both V and W includes GPA, academic standing and achievement,
involvement in extra-curricular activities, community involvement, and a written essay.

Your selection committee for V and W are faculty members from area colleges. You
review the applications for completeness. Completed applications are then placed into a
pool of applicants without prejudice and reviewed by the selection committee.
Scholarship recipients are chosen by the committee members, who have no knowledge
of the employee name or position held. The selection committee is solely responsible for
evaluating the applications and selecting the recipients. None of your employees, your
substantial contributors, your creator, any family members of your contributors, creators,
or employees, X, its owners, employees, or family members of employees or owners are
eligible to serve or otherwise influence the decision of the committee members.

Scholarship funds are given directly to the school prior to the beginning of their first fall
semester. If the student is not enrolled at the college, university, or trade school, the
money is returned to you. Your scholarships are not renewable as they are only open to
graduating high school seniors.

X has over T locations across the country and is unable to estimate how many
employees have graduating seniors that plan on attending a college, university, or trade
school. There are no requirements for the degree received and there are no ties to future
employment with you. You said that based on the number of employees of X and the
ages of those employees, it is reasonable to assume the charitable class is sufficiently
large and open-ended.

You plan to conduct your scholarship program in accordance with the guidelines of
Sections 4.01 through 4.07 of Revenue Procedure 76-47; however, you cannot
guarantee that your scholarship program will meet the percentage guidelines set out Rev.
Proc. 76-47 each year. However, you believe your scholarship program meets the “facts
and circumstances” test under Rev. Proc. 76-47 and is analogous to Rev. Rul. 86-90,

Letter 4793 (10-2012)
Catalog Number 58264E

where the IRS ruled that the taxpayer's grant program satisfied the “facts and
circumstances” test. The primary purpose of your scholarship program, W, is to educate
recipients in their individual capacities, and not to provide extra compensation or other
employment incentives to employees of X. The following facts support you meeting the
“facts and circumstances” test:

(i) Independence of the Selection Committee: You have retained the services
of a local university, an entirely independent party, to serve as the selection
committee for the scholarship recipients.

(ii) Unrestricted Course of Study: The recipients of the scholarships are not
limited in any manner in the course of study they seek to pursue or the
institution they desire to pursue their course of study. The only
requirements are that the recipients are enrolled, or are planning to enroll,
in a college, university, or trade school.

(iii) Objective Selection Criteria: Recipients for scholarships will be selected
based on objective criteria, such as consideration of academic
performance, participation in school and community activities, and a written
essay.

(iv) Eligible Dependents: There are no specific groups of employees that are
disqualified from receiving a scholarship. Further, continued employment is
not a pre-requisite for continued eligibility, provided that the recipient
received his or her award while his or her parent was employed by X.

(v) Size and Number of Scholarships: You plan to offer a small number of
scholarships. This small amount is unlikely to be seen as incentive
compensation for the employees of X.

You represent that you will complete the following: (1) arrange to receive and review
grantee reports annually and upon completion of the purpose for which the grant was
awarded, (2) investigate diversion of funds from their intended purposes, (3) take all
reasonable and appropriate steps to recover the diverted funds, ensure other grants
funds held by the grantee are used for their intended purposes, and (4) 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 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.

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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.

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

You will not limit the recipient to a course of study that would particularly benefit
you or the employer.

The number of associates whose children will be eligible to apply for scholarships
is sufficiently large and open-ended so as to constitute a “charitable class.”

Other conditions that apply to this determination:

Letter 4793 (10-2012)
Catalog Number 58264E

• 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.

Please keep a copy of this letter in your records.

We've sent a copy of this letter to your representative as indicated in your power of
attorney.

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