Employee-dependent scholarship procedures approved

Plain-English summary

A private foundation proposed scholarships for dependent children of qualifying full-time employees of a company. An independent tax-exempt organization would manage the program, and an independent committee would select recipients based on academic performance, leadership, activities, work experience, goals, personal circumstances, recommendations, and financial need. The program would exclude children of higher-level employees and relatives of insiders, limit awards under the percentage tests in Revenue Procedure 76-47, and pay funds for qualified undergraduate expenses. Awards would not renew automatically, although eligible students could reapply. The IRS approved the procedures under section 4945(g)(1), so program expenditures will not be taxable if operated as described.

Ruling snapshot

• Question: Do the employer-related scholarship procedures satisfy the advance-approval requirements of section 4945(g)(1)?
• Outcome: Approved, subject to Revenue Procedure 76-47 and the described eligibility, selection, payment, and monitoring rules
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B), and 4945; Rev. Proc. 76-47; Rev. Proc. 85-51

Full text (IRS public release)

Department of the Treasury Date:

Internal Revenue Service 07/17/2023

Tax Exempt and Government Entities Taxpayer ID number:
P.O. Box 2508
Cincinnati, OH 45201

Person to contact:

Release Number: 202341011
Release Date: 10/13/2023

LEGEND UIL: 4945.04-04
X = Name

Y = Name

B = Number

C = Number

D = Number

e 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 a scholarship program for the dependents of employees of X to support

qualified education-related expenses, such as tuition, fees, books, and required supplies, at accredited two- or

four-year colleges, universities or vocational-technical schools. Awards are for undergraduate study only. The
scholarships will be promoted on X's employee websites and in X's materials as well as on the Internet.

Your scholarship program is managed by Y, an independent IRC Section 501(c)(3) organization. Applicants
must:

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

* Be dependent children age B years and under of full-time X employees who have a minimum of C months
employment with X as of the application date.

* Be high school seniors, high school graduates or current college undergraduates.

* Plan to enroll in full-time undergraduate study at an accredited two- or four-year college, university or
vocational-technical school for the entire upcoming academic year.

Children of employees above the Director level of X are not eligible to apply for scholarships. Further, no
relative of members of the selection committee, or of your officers, directors, or substantial contributors are
eligible for the scholarship program.

The number of scholarships provided may vary from year to year but will be consistent with the requirements
set forth in Rev. Proc. 76-47 as amended. Specifically, the grants in any year will generally not exceed 25% of
the number of eligible children of employees of X who were (i) eligible, (ii) applicants for such grants, and (iii)
considered. In the first year, up to D awards of e dollars each will be granted.

Scholarship recipients will be selected by a selection committee provided by Y and, accordingly, will be totally
independent of X. Criteria for the scholarship award used by the selection committee will include academic
performance, demonstrated leadership and participation in school and community activities, work experience, a
statement of career and educational goals and objectives, unusual personal or family circumstances and an on
line recommendation. Financial need must also be demonstrated.

Scholarship awards are not renewable; however, students may reapply in each year that they meet the eligibility
criteria. Previous award recipients of scholarships are not subject to the employment eligibility requirement.

Scholarship awards are made payable to the educational institution and sent to the student for disbursement to
the school to be used for qualified education-related expenses of tuition, fees, books, and required supplies

If the terms of the scholarship are violated, the institution will refund any unused funds to Y. Y will then update
the student record and place the dollars in your account to be used for future awards.

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.

* 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.

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

* 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