IRS approves a private foundation's employer-related scholarship program

Plain-English summary

The IRS approved a private foundation's program to award scholarships to eligible children of an employer's employees. An independent scholarship management company would administer applications, select recipients, and pay awards using objective and nondiscriminatory criteria. The approval applied to the proposed procedures under IRC § 4945(g)(1), including limits on awards, eligible educational institutions, and the absence of financial-need criteria. The ruling also required the foundation to follow the stated procedures and conditions, including the 25 percent limit for new grants described in the ruling.

Ruling snapshot

• Question: Could the private foundation receive advance approval for its employer-related scholarship grant procedures?
• Outcome: Approved
• Key authorities: IRC §§ 4945(d)(3), 4945(g)(1), 117(a), and 117(b)(2); Rev. Proc. 76-47

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508 Director, Exempt Organizations

Cincinnati, OH 45201

Release Number: 201241013 Contact Person:
Release Date: 10/12/2012
Date: July 16, 2012 Identification Number:

Telephone Number:
Employer Identification Number:

Uniform Issue List Number:
4945.04-04

Legend:

B= Scholarship Management Company
C= Scholarship Program

D = Employer
b = percentage
C = pay level

d = number of scholarships
g = dollar amount

Dear

This is in reference to your letter of January 23, 2012, requesting advance approval of
your employer-related grant-making program under section 4945(g)(1) of the Internal
Revenue Code (“Code”).

Our records indicate that you were recognized as exempt from federal income tax under
section 501(c)(3) of the Code and that you are classified as a private foundation as
defined in section 509(a).

Your letter indicates that you will operate a grant-making program called C.

The information submitted indicates that grants funded by you will be administered,
supervised, and paid out by B. B is knowledgeable in the education field and has the
background and knowledge to properly evaluate the potential of applicants.

You will fund scholarships for the children of the employees of D. To be eligible for a
scholarship, applicants must be dependent children, age 26 and under, of full- or part-
time D employees (including retired and deceased employees) who have a minimum of
three years’ employment with D as of the application deadline date. Children of
employees at a pay level of grade c or above are ineligible. Applicants must also be
high school seniors who plan to enroll for the first time or students who are already

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enrolled in a full-time undergraduate course of study at an accredited two- or four-year
college or university or vocational-technical school for the entire academic year. No
employees of B (and affiliates), or any relatives of your officers and directors are eligible
to receive a scholarship distribution.

You will be responsible for (a) publicizing the availability of C and making the application
materials available, (b) verifying eligibility of recipients, (c) reviewing annual reports
provided by B regarding administration of C, (d) investigating diversions of funds from
their intended purpose, and (e) taking all reasonable and appropriate steps to recover
diverted funds, if any.

B will (a) receive, acknowledge, and process all applications, (b) evaluate applicants, (c)
select and notify recipients for awards, (d) notify non-recipients, (e) confirm enrollment
in an approved educational institution, (f) keep permanent records of the meetings and
actions of the selection committee, (g) account for all funds under the control of the
selection committee, (h) make payment of the award, and (i) report at least annually to
you regarding the administration of the program.

Recipients are determined solely by B utilizing selection criteria you provided whereby
each candidate is evaluated based on the following: the consideration of past academic
performance and future potential, unusual personal or family circumstances, leadership
and participation in school and community activities, work experience, statement of
career and educational aspirations and goals, and an outside appraisal. Financial need
will not be considered. There shall be preference that no less than b percent of
scholarship awards will be designated for “first generation” college applicants, where
“first generation” is defined as students whose parents never enrolled in postsecondary
education.

In the initial year, you will award up to d scholarships of g dollars each. Thereafter, your
board of directors shall determine the number of scholarships to be provided each year,
provided, however that you shall not increase the number of scholarships from the
number of recipients chosen by the selection committee. In addition, the number of new
grants in any year will not exceed 25% of the number of employees’ children who: (i)
were eligible; (ii) were applicants for such grants; and (iii) were considered by the
selection committee in selecting the recipients of grants in that year.

Scholarships will be awarded solely in the order recommended by the B selection
committee. Public announcement of C scholarships will be made either by B selection
committee or by you. All scholarships are in the form of absolute grants payable directly
to the recipient. Grants may only be used to pay “qualified tuition and related
expenses”. All scholarships are non-renewable, but recipients may reapply for awards
in consecutive years as long as they meet the eligibility requirements. All scholarships
will be awarded on an objective and nondiscriminatory basis.

The scholarships will not be used as a means of inducement to recruit employees for
the company nor will a grant be terminated if the employee leaves the company. If a

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scholarship is awarded and the recipient applies for additional scholarships to continue
studies, the recipient may not be considered ineligible for a subsequent scholarship
simply because that individual or the individual's parent is no longer employed by D.

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. When a scholarship is
awarded, there is no requirement, condition, or suggestion, express or implied, that the
recipient's parent is expected to render future employment services, or be available for
such employment to D, any subsidiaries of D, or you.

The recipient will not be restricted in his/her course of study. B will 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).

Revenue Ruling 81-217, 1981-2 C.B. 217, describes a situation involving a private
foundation making grants to an organization that is not a private foundation to provide
scholarships only to children of a particular employer. The organization that is not a
private foundation evaluates the students according to its own criteria, including student
performance on a qualifying examination. Since grant funds are distributed only to
children of employees of a particular company, students who receive scholarships are
not selected “completely independently” of the grantor. Accordingly, any such
scholarships awarded and paid after March 8, 1982, are considered to be individual
grants under section 4945(d)(3), for which advance approval of grant procedures are
required under section 4945(g).

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.

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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
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.

This ruling will be made available for public inspection under section 6110 of the Code
after certain deletions of identifying information are made. For details, see enclosed
Notice 437 Notice of Intention to Disclose. A copy of this ruling with deletions, that we
intend to make available for public inspection, is attached to Notice 437 If you disagree
with our proposed deletions, you should follow the instructions in Notice 437

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.

We have sent a copy of this letter to your representative as indicated in your power of
attorney.

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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,

Holly Paz
Director of Exempt Organizations
Rulings and Agreements