IRS approves a private foundation's employer-related scholarship procedures under section 4945(g)(1)

Plain-English summary

A private foundation asked the IRS to approve, in advance, the way it runs an employer-related scholarship program, and the IRS approved it. This advance approval matters because a private foundation that makes grants to individuals for study normally triggers an excise tax under section 4945 unless its procedures are cleared beforehand under section 4945(g). The program funds "memorial" scholarships for the children of a particular company's employees to attend accredited colleges or trade schools, awarded by an independent committee of community leaders based on grades, essays, extracurricular activities, and community involvement, and paid directly to the schools. The IRS determined the procedures meet section 4945(g)(1) and the employer-related-scholarship guidelines of Revenue Procedure 76-47, including the 25% and 10% limits on how many employees' children may receive awards, so the grants are not taxable expenditures. The awards are tax-free scholarships to recipients under section 117 to the extent used for qualified tuition and related expenses. The approval applies only to this program and only if the facts do not change substantially.

Ruling snapshot

• Question: Do a private foundation's employer-related scholarship procedures qualify for advance approval under IRC § 4945(g)(1) and Rev. Proc. 76-47?
• Outcome: Approved (grants made under the program are not taxable expenditures).
• Key authorities: IRC § 4945(d)(3), (g)(1); IRC § 117; Rev. Proc. 76-47; Rev. Proc. 85-31.

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

P.O. Box 2508
Cincinnati, OH 45201

Date: December 8, 2021

Release Number: 202209013

Taxpayer ID number:

Release Date: 3/4/2022

Person to contact:

LEGEND UIL: 4945.04-04
X = Scholarship
Y = Company
Z = number
w dollars = amount

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
Your letter indicates you will operate an employer-related scholarship program called X.

The purpose of X is to provide the eligible children of Y employees an opportunity to compete for one of Z
memorial scholarships, worth up to w dollars each, to be used to pursue a degree at an accredited postsecondary
educational institution.

To advertise your scholarship program to Y employees, you will use promotional flyers and posters, email
campaigns to executives, presentations at company meetings, and the employee portal website.

To be eligible, the children of Y employees must:

• Be citizens of the United States,
• Be graduating high school seniors with a GPA of at least 2.5, and
• Show proof of acceptance at an accredited, non-profit university, college, or trade school.

Eligible applicants must submit a completed application form, two letters of recommendation, and two separate
essays. Essays must describe applicants' (1) community service and leadership and (2) reason for their chosen
field of study.

Recipients are selected based on academic standing and achievement, involvement in extracurricular activities,
involvement in the community, and the two written essays.

Your scholarship committee will include three to five community leaders. Your board of directors will select and
replace scholarship committee members based on their demonstrated community leadership.

Scholarships will be paid directly to the recipients' qualifying educational institutions. If a recipient is not enrolled
and in good standing, any remaining scholarship funds will be forfeited and returned to you. Scholarships are not
renewable.

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,
• 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)(i).

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. 85-31, 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 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 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.

• 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 IRS at:
  Internal Revenue Service
  Exempt Organizations Determinations
  TE/GE Stop 31A Team 105
  P.O. Box 12192
  Covington, KY 41012-0192

• You can't 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 IRC 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'll make this determination letter available for public inspection after deleting personally identifiable
information, as required by IRC Section 6110. We've enclosed Letter 437, Notice of Intention to Disclose -
Rulings, and a copy of the letter that shows our proposed deletions.

• If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us.
• If you agree with our deletions, you don't need to take any further action.

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

Letter 4792 (Rev. 4-2021)
Catalog Number 58263T