IRS pre-approves a company foundation's employer-related scholarship program for employees' children under § 4945(g)(1)

Plain-English summary

A private foundation tied to a company asked the IRS to pre-approve its procedures for awarding scholarships to the children of the company's employees. This advance approval matters because a private foundation that gives grants to individuals for study normally makes a "taxable expenditure" (subject to excise tax) unless it first gets IRS sign-off on its selection procedures under section 4945(g)(1). The IRS approved the procedures. It found the program meets the requirements: an independent selection committee picks recipients on objective, nondiscriminatory criteria (grades, financial need, activities, recommendations, an essay); awards go directly to the school for tuition and required costs; children of owners, directors, and officers are excluded; and the program is capped by the percentage limits of Rev. Proc. 76-47 that keep employer scholarships from being disguised compensation. Because the procedures qualify, the grants are not taxable expenditures for the foundation, and they are tax-free scholarships to the students to the extent used for qualified tuition and expenses under section 117. The approval applies only to this program as described and requires the foundation to keep records, monitor grantees, and report significant changes. It matters to companies that run scholarship programs for their workforce's families and want to avoid excise-tax exposure.

Ruling snapshot

• Question: Do the foundation's employer-related scholarship procedures qualify for advance approval under IRC § 4945(g)(1)?
• Outcome: approved
• Key authorities: IRC § 4945(d)(3), (g)(1); IRC § 117(a), (b); IRC § 170(b)(1)(A)(ii); Rev. Proc. 76-47; Rev. Proc. 85-51

Full text (IRS public release)

internal Revenue Service 06/05/2023

Tax Exempt and Government Entities Taxpayer ID number:
I P.O. Box 2508

Cincinnati, OH 45201

Aa Department of the Treasury Date:

Person to contact:

Release Number: 202335016
Release Date: 9/1/2023

LEGEND UIL: 4945.04-04
B = Program

C = Age

D=GPA

y dollars =

z dollars =

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 the B for your current employee’s children. B will be offered annually and
may be renewed. B will be awarded to full-time students in the amount of y per scholarship with a grand total
amount of z awarded per year. The award will be given directly to the school and applied to tuition, fees,
required books, and supplies.

B will be publicized on the company’s website, intranet site, third party administrator's website and via monthly
communication meetings held with employees.

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T

The criteria to apply for the scholarship are

¢ Plan to continue their education either in an accredited non-profit two-year or four-year college, university
or vocational-technical school,

¢ The student must be under the age of C and a natural child, legally adopted child, or a stepchild of a current
employee and have a federal income tax status as a dependent of such employee,

¢ Financial Need

¢ Community and school activities

¢ A recommendation from a teacher or work supervisor

¢ A minimum grade point average during the prior year of school of at least D or evidence of satisfactory
performance in a vocational/ technical program

* Submission of an essay describing a leadership activity

If a student wants a renewal scholarship, they must meet the following criteria

¢ Submit an application annually during the term of their attendance at an accredited non-profit two-year or
four-year college, university or vocational/technical program,

¢ A minimum grade point average during the prior year of school of at least D or evidence of satisfactory
performance in a vocational/ technical program,

* Be in good standing,

¢ Financial Need,

¢ No particular program of study is required for eligibility,

¢ Employment by the parent is not a condition for receipt of a renewal.

The following individuals will not be eligible to receive or renew scholarships: any child or relative of an
owner, director, or officer.

A third-party administrator will administer the program, make all award decisions and notify the recipients.
Awards will be granted without regard to race, color, creed, relation, sexual orientation, gender, disability, or
national origin. The third-party administrator will oversee the grant making, reporting and payment process. If a
student is not in good standing or not enrolled the funds will be withdrawn.

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.

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T

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 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.

¢ The effective date of our approval is , which is the date your request was submitted.

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T

* 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.

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

Enclosures:
Letter 437

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T