PLR 200224030: Employee children's scholarship procedures approved

Plain-English summary

An organization sought advance approval for scholarships for employees' children, funded through a public charity that would select recipients and supervise the awards. The charity would use academic performance, counselor appraisals, activities, leadership, and financial need. The IRS approved the grant procedures under IRC § 4945(g)(1), so grants made under them would not be taxable expenditures under § 4945(d)(3). The ruling also states that qualifying amounts used for tuition and related expenses are eligible for the § 117(a) income exclusion. Approval depends on the program operating as described, following the limits in Revenue Procedure 76-47, and avoiding grants to the organization's insiders or selection committee.

Ruling snapshot

• Question: Do the proposed employee children's scholarship procedures qualify for advance approval under § 4945(g)(1)?
• Outcome: Approved, subject to the stated procedures and conditions.
• Key authorities: IRC §§ 4945(g)(1), 4945(d)(3), 117(a), 170(b)(1)(A)(ii); Rev. Proc. 76-47.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: MAR 8 2002
Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:

Legend
B =
C =
D =

Dear Sir or Madam:

This is in reference to your letter of February 7, 2002, requesting advance approval of your grant procedures under section 4945(g) of the Internal Revenue Code.

The information submitted indicates that grants will be administered and supervised by B. B is exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code and has been classified as other than a private foundation under sections 509(a)(1) and 170(b)(1)(A)(vi).

Your scholarship program is called C. Under the terms of an agreement, you will make annual contributions to B to fund scholarships for the children of the employees of D. B will prepare and furnish application forms, receive all applications, determine the recipients and amount to be awarded, notify the recipients of the award, confirm enrollment in an educational institution, make payment of the award, and supervise and investigate the use of the grant funds by the recipients in their educational programs. Recipients are determined solely by B utilizing selection criteria whereby each candidate is evaluated based on the following: scholastic aptitude as measured by performance on the scholastic aptitude test; scholastic performance measured by rank in class; counselor appraisal; and interests, activities and leadership contributions. In addition, financial need is taken into consideration.

The scholarships will not be used as a means of inducement to recruit employees for D nor will a grant be terminated if the employee leaves the company. Scholarships will only be awarded to students that plan to enroll in an institution that meets the requirements of section 170(b)(1)(A)(ii) of the Code. The recipient will not be restricted in his/her course of study. B will

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supply statistical information on applications received and grants made, which will enable you to maintain the records required by Rev. Proc. 76-47, 1976-2 C.B. 670. You will ensure compliance with the percentage tests under section 4.08 of Rev. Proc. 76-47 in the aggregate with respect to your other scholarship programs available to the same individuals.

Section 4945 of the Code provides for the imposition of taxes on each taxable expenditure of a private foundation.

Section 4945(d)(3) of the Code provides that the term “taxable expenditure” means any amount paid or incurred by a private foundation as a grant to an individual for travel, study, or other similar purposes by such individual, unless such grant satisfies the requirements of section 4945(g).

Section 4945(g)(1) of the Code provides that section 4945(d)(3) shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the Secretary, if it is demonstrated to the satisfaction of the Secretary that the grant constitutes a scholarship or fellowship grant which is subject to the provisions of section 117(a) and is to be used for study at an educational institution described in section 170(b)(1)(A)(ii).

Rev. Proc. 76-47, 1976-2 C.B. 670, sets forth guidelines for a private foundation conducting an employer related grant program to obtain advance approval of its procedures for conducting such a program under section 4945(g) of the Code. Sections 4.01 through 4.07 set forth seven conditions which a private foundation must meet in order to obtain advance approval of its procedures under section 4945(g) of the Code. Section 4.08 provides that a private foundation which makes scholarship awards to children of employees of a company, or to the employees themselves will meet this test if it limits these grants to 25% of all eligible applicants or 10% of all those shown to be eligible in any given year. Renewals of grants awarded in prior years will not be considered in determining the number of grants awarded in a current year.

Based upon the information submitted, and assuming your program will be conducted as proposed, with a view to providing objectivity and nondiscrimination in the awarding of scholarship grants, we rule that your grants to B for the awarding of scholarship grants comply with the requirements of section 4945(g)(1) of the Code. Expenditures made in accordance with these procedures will not constitute “taxable expenditures” within the meaning of section 4945(d)(3) of the Code, and as such are eligible for the exclusion from income provided for in section 117(a) of the Code to the extent that such grants are actually used for qualified tuition and related expenses within the meaning of section 117(b)(2) of the Code.

This ruling is conditioned on the understanding that there will be no material changes in the facts upon which it is based. It is further conditioned on the understanding that no grants will be awarded to your organization's creators, officers, directors, trustees, or members of the selection committee, or for a purpose inconsistent with the purposes described in section 170(c)(2)(B) of the Code.

The approval of your grant-making procedures is a one time approval of your system of

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standards and procedures for selecting recipients of grants that meet the requirements of section 4945(g)(1) of the Code. Thus, approval will apply to succeeding grant programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request.

We are informing the Ohio TE/GE office of this action. Please keep a copy of this ruling with your organization's permanent records.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

If you have any questions about this ruling, please contact the person whose name and telephone number are shown in the heading of this letter.

Sincerely,

(signed) Gerald V. Sack

Gerald V. Sack
Manager, Exempt Organizations
Technical Group 4