Employer-related scholarship procedures receive approval

Plain-English summary

A private foundation proposed scholarships for children of qualifying consultants affiliated with a member company. Three retired academics independent of the foundation and company would select recipients using academic achievement, financial need, recommendations, community activity, and related criteria. The program would not recruit workers, end awards when a parent left the company, or restrict study to fields benefiting the company, and it would observe the percentage limits for employer-related scholarships. The foundation would require annual academic reports, investigate misuse, recover diverted funds, and suspend later payments when necessary. The IRS approved the procedures under IRC § 4945(g)(1), subject to continued compliance with Revenue Procedure 76-47 and its percentage tests.

Ruling snapshot

• Question: Did the employer-related scholarship program qualify for advance approval?
• Outcome: Approved, while the program complies with Revenue Procedure 76-47
• Key authorities: IRC §§ 117(a), 170(b)(1)(A)(ii), and 4945(g)(1); 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

Release Number: 201501020 Employer Identification Number:

Release Date: 1/2/2015

Date: October 9, 2014 Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

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 for the

children of X consultants.

You will use scholarship grants for undergraduate or graduate study at an educational
institution that normally maintains a regular faculty and curriculum described in Code
section 170(b) (1) (A) (ii). You will pay grants directly to the educational institution.

You will award scholarship grants in an objective and nondiscriminatory manner. Any
child of a consultant holding a pin level of Y or above and in good standing with an X

Letter 4793 (10-2012)
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member company will be eligible to apply; however, relatives of your board members or
officers will not be eligible for grants.

Applicants may obtain an application through the X website. You will base the amount of
a grant on your available resources and the financial needs of the applicant. Criteria that
will be used to select recipients will include prior academic performance, financial need,
recommendations from instructors and/or colleagues, entrance exam scores, community
involvement and extracurricular activities, and educational awards, honors and
achievements. You will give preference to applicants raised by a single parent whose
spouse suffered a premature death.

For every grant made by you, you will require an annual report, verified by the
educational institution attended by the grantee, of courses taken and the grantee's
grades in those courses. A grant recipient may apply to renew a grant, however, a
grantee who does not submit the annual report mentioned above along with a current
federal student aid report would not be eligible for grant renewal. If an applicant fails to
fulfill the terms of a grant, the remaining grant funds, if any, shall be subject to immediate
return.

You will arrange to receive and review grantee reports annually and upon

completion of the scholarship, investigate diversions and/or suspected diversions of
funds from their intended purposes. If such diversions occur, you will take all reasonable
and appropriate steps to recover diverted funds, ensuring the use of your funds by the
grantee for their intended purposes. You will withhold further payments to a grantee
suspected of diversion until you obtain assurance that future diversions will not occur and
that the grantee will take extraordinary precautions to prevent future diversions from
occurring.

You will maintain records identifying recipients of the grants, including

names, addresses, purposes of awards, amount of each grant, manner of selection,
and relationship (if any) to your officers, directors, or donors. Its records for each
individual grant will include information obtained to evaluate the grantee, identify
whether the grantee is an eligible applicant, establish the amount and purpose of each
grant, and establish that it undertook the supervision and investigation of grants
described above.

The number of grants that you will make annually will depend on the number of
qualified applicants and your available financial resources. In addition to the
procedures outlined above, Taxpayer will comply with the requirements of Revenue
Procedure 76-47.

Your selection committee consists of three retired academicians who are independent
from X. The committee will have exclusive rights to select recipients and establish
amounts of grants. You may reduce, but may not increase, the number of scholarships
recommended by the committee.

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Courses of study for which scholarship grants are available will not be limited to
those that would be of particular benefit to X. The terms of a scholarship grant will
be consistent with the disinterested purpose of enabling a grantee to obtain an
education for his or her personal benefit.

A scholarship will not terminate because the recipient's parents end their relationship
with X. For scholarships awarded for more than one academic year, you will
base renewal solely on criteria unrelated to the relationship of the recipient's parents
with X.

The number of scholarship grants awarded every year will satisfy the percentage
test described above Revenue Ruling 76-47.

You and X verify applicant eligibility for the selection committee, which consists wholly of
individuals independent from you, its organizer and X. The selection committee will send
their recommendations to you and you will make awards in the order recommended by
your selection committee. You and your selection committee will ensure that the number
of awards to children of X employees does not exceed the 25 percent threshold.

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 recipient may use the scholarship 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:

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• 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 will not exceed 10
percent of the number of employees who were eligible for grants, were applicants
for grants, and 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
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 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 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::

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.

• All funds distributed to individuals will 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 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,

Director, Exempt Organizations

Letter 4793 (10-2012)
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