Determination 1306025: IRS approves employer-related scholarship grant procedures

Plain-English summary

The IRS approved a private foundation’s procedures for awarding employer-related scholarships. The program will provide grants to eligible children of employees of a company and its affiliate companies, as well as to eligible employees, based on objective academic criteria and without regard to ethnic, racial, or religious background. The IRS determined that the procedures continue to meet section 4945(g)(1), so expenditures under them will not be taxable expenditures, assuming the program is conducted as described. The letter also states that qualifying awards used for tuition and related expenses are not taxable to recipients, subject to section 117(b) and the other stated conditions.

Ruling snapshot

• Question: Do the foundation’s proposed employer-related scholarship procedures qualify for advance approval under IRC § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 4945(g)(1), 117(a), 117(b), 170(b)(1)(A)(ii), 170(c)(2)(B); Rev. Proc. 76-47; Rev. Proc. 85-51

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Number: 201306025
Release Date: 2/8/2013 Employer Identification Number:

Contact person - ID number:

Date: November 14, 2012
Contact telephone number:

UIL: 4945.04-04
LEGEND

W = scholarship program
X = business

Y = businesses

Z = dollar amount

Dear

You asked for advance approval of your employer-related scholarship grant procedures
under Internal Revenue Code section 4945(g). This approval is required because you are
a private foundation that is exempt from federal income tax. You requested approval of
your scholarship program to fund the education of certain qualifying students.

Our determination

We initially approved your procedures for awarding employer-related scholarships in our
letter dated March 2000. 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 continue to meet the requirements of Code section
4945(g)(1). As a result, expenditures you make under these procedures won't be taxable.

Also, 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 Code section 117(b)).

Description of your request

Your letter indicates you will continue to operate an employer-related scholarship
program called W. The purpose of W is to assist students with financial aid. Awards will
be made to eligible persons on a nondiscriminatory basis without regard to ethnic, racial
or religious background. Dependent children of the employees of X, and X’s nine affiliate
companies, Y, who meet certain academic and other requirements will be eligible to
apply for grants.

A maximum award of z dollars per year will be granted. This may be increased in the

future as costs increase. The number of grants will be limited by Revenue Procedure 76-

47. Awards will be granted with first preference to undergraduate students enrolled at an
    accredited college or university based on academic standings (GPA). If additional grants

Letter 4793 (10-2012)
Catalog Number 58264E

are available, the selection committee will consider first students pursuing post-graduate
studies and then students beginning in Grade 12 descending to Kindergarten. All grants
awarded will be based on objectively determined academic criteria and the student must
document progress toward a degree or diploma to be eligible for future grants.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(Code section 4945). 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 of the following requirements of Code 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 Code section 117(a).

The grant is to be used for study at an educational organization described in Code
section 170(b)(1)(A)(ii).

Revenue Procedure 76-47, 1976-2 C.B. 670, 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
Code section 117(a). If the program satisfies the seven conditions in sections 4.01
through 4.07 of Revenue Procedure 76-47 and meets the applicable percentage tests
described in section 4.08 of Revenue Procedure 76-47, we will assume the grants are
subject to the provisions of Code section 117(a).

You represented that your grant program will meet the requirements of either the 25
percent or 10 percent percentage test in Revenue Procedure 76-47. These tests require
that:

• The number of grants awarded to employees’ children in any year won't exceed 25
percent 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
percent 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 percent
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 Revenue Procedure 85-51, 1985-2 C.B. 717, when applying the
10 percent test applicable to employees’ children.

In determining how many employee children are eligible for a scholarship under the 10
percent test, a private foundation may include only those children who submit a written

Letter 4793 (10-2012)
Catalog Number 58264E

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 Revenue Procedure 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 as long as your procedures comply with sections
4.01 through 4.07 of Revenue Procedure 76-47 and with 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 Cincinnati Office of Exempt Organizations at:

Internal Revenue Service

Exempt Organizations Determinations
P.O. Box 2508

Cincinnati, OH 45201

You cannot 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 Code 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've sent a copy of this letter to your representative as indicated in your power of
attorney.

Letter 4793 (10-2012)
Catalog Number 58264E

Please keep a copy of this letter in your records.
If you have questions, please contact the person listed at the top of this letter.

Sincerely,

Holly O. Paz
Director, Exempt Organizations
Rulings and Agreements

Letter 4793 (10-2012)
Catalog Number 58264E