Determination 1315032 approves an employer-related scholarship procedure

Plain-English summary

The IRS approved an employer-related scholarship program operated by a private foundation. The program was designed to support qualifying dependents of associates and employees connected with the employer and its franchise properties. The approval relied on external administration, objective selection procedures, direct payment to qualifying educational institutions, reporting, and restrictions on grants to disqualified persons. Awards used for qualified tuition and related expenses could qualify as scholarships or fellowships under section 117.

Ruling snapshot

• Question: What did the IRS decide under the facts presented?
• Outcome: Approved, on the stated facts and representations.
• Key authorities: IRC § 4945; IRC § 117; IRC § 170; IRC § 6110.

Full text (IRS public release)

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

Release Number: 201315032
Release Date: 4/12/2013

Employer Identification Number:
Date: 1/17/13
UIL Code: 4945-04-04 Contact Person - ID Number:

Contact Telephone Number:

LEGEND

X= Program Name
Y = Employer Name
b = Number

c dollars= 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 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 Code section 4945(g)(1). As a result, expenditures you make under
these procedures will not 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 operate an employer-related scholarship program called X.

The purpose of X is to promote and encourage educational efforts of eligible dependents
of Y associates, employees of franchised properties of Y and dependents of employees
of franchised properties. A dependent is defined as and limited to children, step children
or adopted children of eligible associates and employees.

Letter 4793 (10-2012)
Catalog Number 58264E

2

As a means of promoting and encouraging educational efforts, you will award
scholarships annually to eligible dependents of Y associates, employees of franchised
properties and dependents of employees of franchised properties. Scholarship recipients
will receive a lump sum amount of c dollars toward the academic school year. You will
award no more than b scholarships but this number may vary based on limitations as set
forth by the percentage test in Revenue Procedure 76-47.

In all instances, the grant recipients are selected on an objective and non-discriminatory
basis. You represent that no grant will be awarded to any disqualified person with respect
to you for a purpose that is inconsistent with the purposes describe in Section
170(c)(2)(B) of the code and that no person connected with either you or the selection
committee will derive a private benefit either directly or indirectly from the selection of any
individual grant recipient.

Applicants must be a high school senior, college freshman, sophomore or junior pursuing
an undergraduate degree. In addition, applicants must meet one of the
following:

a. A dependent son or daughter of a Y corporate associate attending school full-time
for the upcoming academic year.

b. A dependent son or daughter of an employee of a franchised Y property in the
United States attending school full-time for the upcoming academic year or

c. An employee of a franchised Y property in the United States that is one of the
following

e Apart-time employee that attends college full-time
_¢ A full-time employee that attends college part-time or
e A full-time employee that attends college full-time.

Dependents of associates at the Vice President level and above are not eligible to
apply for scholarships. ,

The person whose employment makes the applicant eligible for this award must be
employed by Y or a franchised Y property at the time the awards are announced. As long
as this condition is met, award recipients will retain the award for the full academic term.

Scholarship applications will be submitted to an external administrator, who will collect
and verify the data as well as select the award winners. There are no minimum
requirements for GPA, SAT/SAT scores or a specified amount of community service or
work hours in order to apply; however, an independent selection committee will evaluate
the applications based on a combination of these selected criteria, community
involvement or work experience, essay and verification of experiences.

Letter 4793 (10-2012)
Catalog Number 58264E

Applications, ACT/SAT test scores, high school transcripts and college/university
transcripts (if applicable) must be electronically uploaded to the application site.
Applicants will be asked to write a brief essay about one job or community service activity
that they included on the application. The applicant will be scored on this essay.
Applications missing documentation or electronic verifications will not be considered in
the scholarship selection process.

All awards are for one year and applied for on an annual basis. You represent that all
scholarships awarded will be made directly to a qualifying educational institution, thereby
showing that the recipient qualified for such scholarship.

Once the scholarships are granted, there is no requirement of continued employment
and no obligation of the recipient or the parent/guardian to provide additional services to
you, Y, or to any of its franchises. There is no requirement related to a course of study
for the recipient and once the scholarships are granted the recipient is free to take
whatever courses they desire.

Grants will be paid directly to a qualifying institution and will satisfy the reporting
requirements of Section 53.4945-4(c)(5) of the regulations and any funds not used for
qualifying educational purposes will be returned to you. In addition, you confirmed your
understanding that if reports or other information indicates the grant proceeds are not
being used for the purpose for which the grants were made that you will investigate the
misuse of funds and withhold further payments. In addition, you will take all reasonable
and necessary steps to recover grant funds or to ensure restoration of such funds and
their dedication to the purposes the grants funds are financing.

You will maintain records on all information obtained by you to evaluate the qualifications
of potential grantees, the identification of grantees (including any relationship of any
grantee to you or to a director or officer of your organization), the purpose and amount of
each grant, and any additional information obtained in complying with its grants
administration procedures.

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).

Letter 4793 (10-2012)
Catalog Number 58264E

4

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 11 7(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:

e¢ 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

e 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),

You represented that your procedures for awarding grants under this program will meet
the requirements of Revenue Procedure 76-47. In particular:

e 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:
e This determination only covers the grant program described above. This approval
will apply to succeeding grant programs only if their standards and procedures do
not 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 meet 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.

e 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::

Letter 4793 (10-2012)
Catalog Number 58264E

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.

e 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).

e You should keep adequate records and case histories so that you can substantiate
your grant distributions with the IRS if necessary.

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

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