A private foundation gets advance approval to run an employer-related scholarship program without triggering excise tax

Plain-English summary

A private foundation runs a scholarship program for the children of a particular employer's workers and asked the IRS to pre-approve its award procedures. This approval matters because a private foundation that makes grants to individuals for study normally makes a "taxable expenditure" subject to excise tax under section 4945, unless the IRS approves the grant procedures in advance under section 4945(g). Employer-related scholarships face extra scrutiny so they do not become a disguised fringe benefit. The IRS approved the foundation's procedures. It found the program uses an independent selection committee, does not function to recruit or retain employees, does not tie the award to a field of study benefiting the employer, and will satisfy the percentage limits (the 25 percent or 10 percent tests) of Revenue Procedure 76-47. As a result, grants made under these procedures are not taxable expenditures, and they are tax-free scholarships to the students if used for qualified tuition and related expenses under section 117. The approval is limited to the described program and depends on the foundation actually operating it as represented.

Ruling snapshot

• Question: Should the IRS grant advance approval of the foundation's employer-related scholarship award procedures under section 4945(g)?
• Outcome: Approved (procedures meet IRC § 4945(g)(1); grants are not taxable expenditures)
• Key authorities: IRC § 4945(d)(3), § 4945(g)(1); § 117; § 170(b)(1)(A)(ii); Rev. Proc. 76-47; Rev. Proc. 85-51

Full text (IRS public release)

Department of the Treasury
ya) Internal Revenue Service

Tax Exempt and Government Entities
IRS P.O. Box 2508

Cincinnati, OH 45201
Date: August 10, 2021

Taxpayer ID number:

Number: 202144034

Release Date: 11/5/2021 Belson Saath
Name:
ID number:
Telephone:
LEGEND UIL: 4945.04-04
B = Employer 1

C = Community organization
D = Scholarship Program

E = Employer 2
F = Employer 3
G = Country
H = number

j dollars = amount
k dollars = amount
m = year

Dear

You asked for advance approval of your employer-related scholarship procedures under Internal Revenue Code
Section (IRC) 4945(g)(1). You requested approval of your scholarship program to fund the education of certain
qualifying students.

This approval is required because IRC Section 4945 provides for the imposition of taxes on each taxable
expenditure of a private foundation. IRC Section 4945(d)(3) provides that the term "taxable expenditure"
includes any amount paid or incurred by a private foundation as a grant to an individual for travel, study, or
similar purposes by the individual, unless the grant satisfies the advance approval requirement of IRC Section
4945(g).

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 IRC Section 4945(g)(1). As a result,
expenditures you make under these procedures won't be taxable.

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 IRC Section 117(b)).

Description of your request

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Your letter indicates you will operate an employer-related scholarship program called D. You had an approved
scholarship program in place, now you are modifying it.

Your purpose is to recognize and reward outstanding high school academic and non-academic achievements, and
to provide financial assistance to deserving scholars pursuing a bachelor’s degree on a full-time basis from an
accredited U.S. or G college or university. The scholarship does not cover attendance at for-profit colleges, for-
profit universities or trade schools.

The purpose of D is to provide scholarship grants to a limited number of children of employees of B. The annual
scholarship is j dollars per year and is renewable for up to a maximum of additional years, based on
evidence of satisfactory academic progress.

Recipients of scholarships awarded prior to m will remain eligible to renew their scholarship awards at the k
dollars level, subject to the restrictions contained in the scholarship process.

The grants are for authorized college expenses which are defined as tuition, academic fees, books, room and
board. The grants will be paid directly to the educational institution in the United States or G. A college or
university is defined as an educational organization described in IRC Section 170(b)(1)(A)(ii) of the Code.

The scholarship program administrator is currently C. You may from time to time select a new scholarship
administrator to replace C. Any new scholarship program administrator will be an organization exempt from
federal income tax under IRC Section 501(c)(3) and independent of you and B.

Information about D is available on B’s website, from C and from guidance counselors at many high schools in
the United States and G within the communities in which B’s facilities are located. Additionally, employees will
be informed of the availability of the scholarship grants through an employee newsletter.

In order to be eligible to be selected for a scholarship, a candidate must be the son or daughter of an eligible
employee (including a stepchild, an adoptive child or a child who does not reside with an eligible employee, but
is a dependent of an eligible employee for federal income tax purposes). An eligible employee is any person
employed by B (or wholly-owned subsidiary) in the United States or G on a full-time basis with at least one year
of continuous service; provided, however, the death of an eligible employee during the year(s) of the candidates’
eligibility to apply for a scholarship will not render the candidate ineligible. However, eligible employees do not
include those employees of B with the title of Vice President or above or those who serve as your trustees or
officers.

A candidate must be in his or her final year of high school, graduate in the current academic year, and enter an
accredited United States public/non-profit college or university or educational organization in G no later than the
next academic year. Exceptions to the requirement that a scholarship recipient enter an accredited college or
university in the United States or G no later than the next academic year may be granted, at the sole discretion of
the scholarship program’s administrator for extreme circumstances, such as a significant health or family
emergency. Such exceptions shall be granted for up to one year and only with the written approval of C. The
exception is available whether the scholarship recipient’s parent remains employed with B. C may not consider
the position of the student’s parent with B in determining whether to grant the exception.

Students entering a United States Military Academy, participating in a R.O.T.C. Scholarship Program, or

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receiving a full scholarship from another source in the United States or G are not eligible to compete for this
scholarship.

Certain college freshman attending an accredited public or private non-profit college or university in the United
States or G may have been ineligible during their final year of high school solely due to the inability of the parent
to satisfy the length of service criteria to qualify as an eligible employee. Should the parent meet the length of
service criteria during the candidate’s freshman year, the candidate may apply for a scholarship in the next
academic year. In such a case all other selection criteria and eligibility requirements must be met. In the event
such a candidate is selected for a scholarship, such scholarship will be renewable for a maximum of

additional school years, based on satisfactory academic progress as determined by C.

The scholarship contains no restriction regarding any candidates’ or recipients’ race, position (other than the
exclusion of certain executives from the definition of eligible employees), services or duties of a candidates’ or
recipients’ parent. In addition, the scholarship will not be used to recruit new employees or as an inducement to
present employees to continue their employment or otherwise follow a course of action sought by B.

A scholarship grant will not be terminated because the recipients’ parent terminates employment with B
subsequent to the awarding of the scholarship, regardless of the reason for such termination. Further, if a
scholarship is awarded for one academic year, no recipient will be ineligible for a scholarship in any subsequent
year (limited by the general restriction on the total number of awards a student may receive) because that
individual’s parent is no longer employed with B. Once an individual has received a scholarship grant, no other
employment criteria will be imposed upon such person’s parent for the renewal of that recipient’s scholarship
grant. Finally, at the time the scholarship is awarded, there will be no requirement, condition or suggestion,
express or implied, that the recipient or the recipient’s parent is expected to render future employment services to
you or B.

The scholarship grants are available for any course of study at an accredited college or university in the United
States and G and are in no way limited to those that would be of particular benefit to you or B. There is no

commitment, understanding, or obligation suggesting that the course of studies be undertaken to benefit you or
B.

Eligibility for renewal is determined by C, based solely on satisfactory academic progress of the recipient as a
full-time student and submission of an annual student statement. Likewise, a recipient who was first awarded a
scholarship as a college freshman, qualifies for renewal for a maximum of , provided he or she is
otherwise eligible. Scholarships may be renewed even if the recipient has successfully completed the
requirements for a bachelor’s degree in less than four years, provided he or she has enrolled in a full-time second
or advanced-degree program at an eligible university or college within 12 calendar months of successful
completion of the undergraduate degree.

In its sole discretion, C may waive the requirement that a recipient be enrolled on a full-time basis and permit the
recipient to be enrolled on a part-time basis at an eligible university or college. This one-time waiver is only
available to a recipient in his or her final semester of study who is expected to graduate at the end of that
semester. The waiver is available whether the recipient’s parent remains employed with B. C may not consider
the position of the recipient’s parent with B in determining whether to grant the waiver.

The selection of grant recipients will be made by a committee chosen by C and will be composed of individuals

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who are totally independent of you and B. No committee member will be a current or former employee of either
E, F, B or you. C will choose committee members based on their background and/or knowledge in the field of
education. No spouse, child or grandchild (or stepchildren or step-grandchildren) of your committee member,
trustee or an officer may be considered for a scholarship grant. C is an independent non-profit corporation
exempt from federal income tax under IRC Section 501(c)(3).

You estimate that the potential number of applicants is substantial as B employs approximately H individuals in
the United States and G who will qualify as eligible employees. The number of scholarship grants awarded in
any year (not including renewals of scholarship grants awarded in previous years) will not exceed _ percent of
the number of eligible employee’s children who: (i) were eligible; (ii) were applicants for a scholarship; and (iii)
were considered by the selection committee in selecting recipients of grants in that year.

The committee will screen candidates based on test scores (the SAT and ACT), class rank, recommendations
from school personnel, as well as conclusions drawn by the committee from personal interviews as to a
candidate’s motivation and character. No consideration will be given to the employment of candidates’ parents or
to B’s line of business, nor will you or B provide any instruction to C as to how scholarship recipients should be
selected.

Grants will be awarded solely in the order recommended by the selection committee and cannot be increased
from the number recommended by the selection committee. Further, only the committee may vary the amounts of
the grants awarded. The announcement of the awards will be made by C and B. You may also verify the
eligibility of each candidate.

The general supervision of the scholarship grants will be undertaken by C. Scholarship grants will be paid to the
educational organization with the understanding that the fund will be used to defray tuition, academic fees,
books, and room and board only so long as such recipient is enrolled in the school and his or her standing is
consistent with the purposes and conditions of the grant.

You will comply with the Office of Foreign Assets Control (OFAC) procedures by verifying that any foreign
recipient of any scholarship grant, the employee-parent, and foreign educational institution to be attended are not
on OFAC’s list of Specially Designated Nationals and Blocked Persons.

You represent that you will complete the following:

• Arrange to receive and review grantee reports annually and upon completion of the purpose for which the
  grant was awarded,

• Investigate diversion of funds from their intended purposes,

• Take all reasonable and appropriate steps to recover the diverted funds and 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 diversion from occurring.

You also represent that you will:

• Maintain all records relating to individual grants including information obtained to evaluate grantees,

• Identify a grantee is a disqualified person,

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• 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

IRC Section 4945 imposes excise taxes on the taxable expenditures of private foundations. 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 the following requirements of IRC 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 IRC Section 117(a).

• The grant is to be used for study at an educational organization described in IRC Section 170(b)(1)(A)(ii).

Revenue Procedure (Rev. Proc.) 76-47, 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 IRC Section 117(a). If the program satisfies the seven conditions in sections
4.01 through 4.07 of Rev. Proc. 76-47 and meets the percentage tests described in Section 4.08 of Rev. Proc. 76-47,
we will assume the grants are subject to the provisions of IRC Section 117(a).

You represented that your grant program will meet the requirements of either the 25% or 10% percentage test in
Rev. Proc. 76-47. These tests require that:

• The number of grants awarded to employees' children in any year won't exceed 25% 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% 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% 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
Rev. Proc. 85-51, when applying the 10% test to employees' children.

In determining how many employee children are eligible for a scholarship under the 10% 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
Rev. Proc. 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 D program described above. This approval will apply to
  succeeding grant programs only if their standards and procedures don't differ significantly from those

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described in your original request.

• This determination is in effect if your procedures comply with Sections 4.01 through 4.07 of
  Revenue Procedure 76-47 and 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.

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, you can contact the person shown at the top of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

cc:

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