Employer-related scholarship procedures approved

Plain-English summary

A private foundation proposed undergraduate scholarships for children and grandchildren of full-time employees of a corporation and its subsidiaries. A separate public charity would administer the program and choose an independent selection committee, while the foundation could verify eligibility but could not select recipients or increase the number of awards after selection. Financial need would not be considered; selection would instead rely on academics, leadership, activities, work experience, personal circumstances, goals, and an outside appraisal. The program could not be used to recruit or retain employees, restrict recipients to study benefiting the employer, or make awards depend on continued employment. Awards also had to remain below the applicable 25 percent or 10 percent limits for employer-related scholarship programs. The IRS approved the procedures under Section 4945(g)(1), conditioned on continued compliance with Revenue Procedure 76-47 and its percentage tests.

Ruling snapshot

• Question: Did the employer-related scholarship program satisfy the advance-approval and percentage-test requirements?
• Outcome: Approved while the procedures continue to comply with Revenue Procedure 76-47
• Key authorities: IRC §§ 117(a), 170(b)(1)(A)(ii), and 4945(g)(1); Rev. Procs. 76-47, 85-51, and 94-78

Full text (IRS public release)

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

Release Number: 201507029
Release Date: 2/13/2015 Employer Identification Number:
Date: 11/18/2014

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

X= Program Name
Y= Corporation Name
Z= Organization Name

b dollars = Amount
c dollars = Amount
d dollars = Amount
e dollars = Amount
f=Number of Awards
g=Number

h=Age

j=Time period
k=Number

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)).

Letter 4793 (10-2012)
Catalog Number 58264E

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Description of your request
Your letter indicates you will operate an employer-related scholarship program called X.
The purpose of X is to promote the life-changing impact of an undergraduate education
by increasing the opportunities for the most impressive children and grandchildren of full-
time employees of Y and its subsidiaries. X will provide scholarships to children and
grandchildren of full-time employees of Y and its subsidiaries to pursue a college or
university education as well as provide additional resources to help working families
provide educational opportunities to their future generations.

X will not be used by Y, any Y subsidiary, or you to recruit employees or induce
employees to continue their employment or otherwise follow a course of action sought by
Y. Your awards are consistent and further the disinterested purpose of enabling the
recipients to obtain an education in their individual capacities solely for their personal
benefit. The recipients will have no commitment, understanding or obligation to undertake
studies for the benefit of Y, or any Y subsidiary. X will not accomplish any commercial
purpose of Y or any of its subsidiaries. Recipients must enroll in a full-time course of
study at an accredited four-year college or university, but may choose any course of
study desired at such college or university. Study must be at a traditional college or
university, not at a proprietary or online school. You impose minimum requirements for
grant eligibility. These requirements relate to the purpose of your program and act to limit
the selection committee’s consideration to those children or grandchildren of employees
who both meet the minimum standards for admission to an education institution for which
grants are available and are expected to attend such institution.

You have an agreement with Z indicating that grants funded by you will be administered,
supervised, and paid out by Z. Z is exempt from federal income tax under section
501(c)(3) of the Internal Revenue Code and has been classified as a publicly supported
organization. Under the terms of the agreement, you will make annual contributions to Z
to fund scholarships for the children and grandchildren of Y’s employees.

You have set aside b dollars to ensure X continues to provide educational opportunities
and may choose to provide additional funding in the future. You anticipate you will
annually make in the range of f grants in the total amount of d dollars; awards will not be
less than c dollars and typically in the range of e dollars. You anticipate receiving
applications from at least g eligible students based upon preliminary information available
to you. However, your awards will not exceed 25 percent of the number of employees’
children who:
• Are eligible;
• Applicants for such grants;
• Considered by the selection committee in selecting the recipients of grants in that
year; or 10 percent of the number of employees’ children who can be shown to be
eligible for grants (whether or not they submitted an application) in that year;

When calculating 25 percent of applicants, you will employ the rounding convention of
Revenue Procedure 94-78. You reserve the right to determine the number of awards that

Letter 4793 (10-2012)
Catalog Number 58264E

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will be less than 25 percent of applicants and/or less than 10 percent of the eligible
applicants.

Because eligibility for X includes both children and grandchildren of employees of Y and
its subsidiaries, you do not have sufficient information to identify the total number of
potential applicants and you are unable to determine with precision how many total
students may be eligible in future years. You will request Y provide information to
determine those who may be eligible for grants but have not submitted an application,
and may from time to time request that Y voluntarily provide census information, which
would identify the pool of potential applicants. You also anticipate that the potential pool
of eligible applicants will increase over time. If necessary, you will reduce the number of
scholarship awards in order to ensure that the number of awards will be less than 25
percent of applicants considered.

However, you reserve the right to provide additional total annual funding for your program
and to change the maximum scholarship award to reflect changing economic
circumstances and the cost of an undergraduate education.

To apply for X, individuals must meet the following requirements:
• Applicants must be age h and under.

• Applicants must be children or grandchildren of full-time employees of Y or its
subsidiaries and employed by Y or its subsidiaries for a minimum of j as of the
application deadline. Alternatively, applicants may be previous recipients of an
award pursuant to the scholarship program regardless of whether their parent or
grandparent continues to be an employee of Y or its subsidiaries. Employment
related factors do not affect eligibility.

• Applicants must be high school seniors who will enroll or are enrolled currently in a
full-time undergraduate course of study at an accredited four-year college or
university for the entire academic year. Awards are for undergraduate study only.

• Applicants may not be relatives of your founder, your directors or employees
of Z, their affiliates and subcontractors and their relatives.

In addition, for purposes of determining eligibility, an applicant may be required to provide
evidence of his or her age and that he or she is a biological child or grandchild, legally
adopted as a child or grandchild, or a stepchild or grandchild of an employee.

Y will publicize X on its website and you will provide information to Y’s employees about
X; the application and instructions are also on Y’s website. Applicants will send their
applications directly to a selection committee chosen by Z so the committee is completely
independent of you. The committee will evaluate and select recipients based on
consideration of past academic performance and potential, unusual personal or family
circumstances, leadership and participation in school and community activities, work

Letter 4793 (10-2012)
Catalog Number 58264E

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experience, statement of career and educational aspirations and goals, and an outside
appraisal from a high school or college counselor or advisor, an instructor or work
supervisor. Financial need is not considered. Once selected, the committee will forward
its list of selected recipients to you solely to verify that such recipients comply with the
eligibility requirements and that the committee has followed the selection criteria in
considering the candidates and in making selections. You or the selection committee will
make the public announcement of the scholarships.

You will confirm annually whether you have sufficient funds allocated to provide
scholarships to all of the selected recipients. You may reduce the number of grants for
any particular year, but will not increase the number of grants after selection of the
recipients. Only the selection committee may vary the amounts of any grant awarded.

The scholarships are not renewable, but a recipient may reapply each succeeding year
for up to k years or until a degree is earned, whichever occurs first. Once you award a
scholarship, any change in the employment of the recipient’s parents and/or
grandparents will no longer be relevant to the selection process.

All recipients under X will enroll in the designated college or university. Z will provide
written notification to scholarship recipients of awards, notify the applicants who will not
be recipients, and mail checks to the applicable college or university of the award. The
written notice to recipients will contain an explanation of the applicable terms and
conditions.

Z will send the awards to the recipients payable to the educational institute. In the
unlikely event that a student is able to cash the check and then misuse scholarship funds,
you will terminate the student’s participation in the scholarship program and would
attempt to recover the misused funds from the student.

Z will collect information regarding your program and you agree to maintain certain
information about your program in accordance with Code Section 4945(d)(3), including
the following:

• The information used to evaluate the qualifications of potential grantees;

• Identification of the grantees (including any relationship of any grantee to the
private foundation), the amount and purpose of each grant;

• All reports and other follow-up data obtained in administering your scholarship
program.

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.

Letter 4793 (10-2012)
Catalog Number 58264E

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• 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).
• Use of 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:

• 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 will not exceed 10 percent of the number of employees who
are eligible for grants, 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.

Letter 4793 (10-2012)
Catalog Number 58264E

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• 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 and not cited as a precedent.

• You cannot rely on the conclusions in this letter if the facts you provided have
changed substantially. You may report any significant changes to your program by
completing Form 8940 and sending it 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.

• You will distribute funds to individuals 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,

Letter 4793 (10-2012)
Catalog Number 58264E

7

Director, Exempt Organizations

Letter 4793 (10-2012)
Catalog Number 58264E