Employee-child scholarship procedures receive approval

Plain-English summary

A private foundation sought advance approval for scholarships benefiting children of current employees with sufficient service and children of employees who died while employed. Applicants had to attend qualifying colleges or universities, provide acceptance and application materials, and satisfy objective academic, financial, and personal criteria unrelated to the parent's job. An independent committee would select recipients, while the employer could not use the program to recruit or retain employees. Awards would be paid directly to educational institutions, multi-year awards required continued good standing, and the program would satisfy the percentage limits for employer-related scholarships. The IRS approved the procedures under IRC § 4945(g)(1), subject to continued compliance with Revenue Procedure 76-47 and its applicable percentage test.

Ruling snapshot

• Question: Did the employer-related scholarship program's eligibility, independent selection, payment, and percentage-limit procedures qualify for advance approval?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), and 4946; Rev. Proc. 76-47

Full text (IRS public release)

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

Number: 201508018 Employer Identification Number:

Release Date: 2/20/2015
Contact person - ID number:

Contact telephone number:
Date: November 25, 2014

LEGEND

C = country
D = country
E = country
X= program 1
Y= bank
Z= program 2

UIL: 4945.04-04

Dear :

You asked for advance approval of your employer-related scholarship 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
You will operate an employer-related scholarship program called X to provide
scholarships to defray the cost of attendance for recipients at an educational institution.

You will publicize the program in announcements to Y employees on the Y intranet, in
newsletters, and email blasts. Such announcements will provide information on the
availability of grants, solicit applicants, provide information about the application process,
and announce the names of recipients. All communications will identify you as the grantor

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of the awards. You have not yet finalized your application for X, but you anticipate that
the application will be substantially similar to the application you currently use for your Z.

Each applicant must satisfy minimum eligibility requirements for scholarship
consideration. The applicant must be the child of a current officer or employee of Y with
at least three years of service or a former officer or employee of Y who died while so
employed, regardless of length of service. Notwithstanding the foregoing, if a grant is
awarded for one academic year and the recipient reapplies for a grant to continue studies
for a subsequent year, the recipient shall not be considered ineligible for a further grant
based on the parent’s employment status with Y. If an awarded grant is for a period of
more than one academic year, subject to renewal, renewal shall not be denied solely on
the recipient's parent's employment status with Y. The applicant must also:

• Bea full time undergraduate or graduate student at an accredited college or
university, located in the US, C, D or E, and that maintains a regular faculty and
curriculum

• Provide your committee with a copy of a letter of acceptance from such an
institution at which the applicant intends to matriculate as a full-time student with
respect to an upcoming academic semester or year

• Complete, sign, and return to the secretary of your selection committee an
application, together with all supporting reports, transcripts, or other
documentation specified on the application, by the established deadline

• Be unrelated to any current member of your selection committee and shall not
otherwise be a “disqualified person” (with respect to you), as defined by section
4946 (a) (1)

If an applicant cannot be expected (reasonably) to attend the required educational
institution, you will not consider their eligibility, even if he or she satisfies the minimum
eligibility requirements at the time of application. Furthermore, you will not base eligibility
on any other employment-related factors, such as the Y employee-parent’s position,
services, or duties, except to the extent, if any, that such services or duties with respect
to you may affect the applicant’s status as a disqualified person.

The selection of recipients shall be based solely upon such objective criteria as may be
established from time to time by the your board, provided that all such criteria shall be
completely unrelated to the employment of the recipient’s parent or parents to Y or any Y
lines of business. Such criteria shall include, but not be limited to, the following:

• Prior academic performance, as reflected on a transcript of the applicant’s grades
for the preceding academic year (or such other period specified) or by the receipt
of academic awards or prizes

• Performance on tests designed to measure ability and aptitude for higher
education

• Written recommendations from instructors or other individuals not related to the
applicant

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• Financial need, as evidenced by a student financial aid report, a proposed budget
showing both educational expenses and all sources of income, and the family
circumstances of the applicant (e.g., number of siblings then enrolled or expected
to be enrolled at an accredited college or university during the forthcoming
academic year)

• Conclusions drawn from personal interviews, personal essays written by the
applicant, or other sources regarding the applicant's motivation, character, and
potential, as evidenced by the applicant’s career plans and goals, extracurricular
activities, community service or involvement, ability to overcome personal or family
adversity, and similar factors

Solely in those instances where your committee has identified two or more potential
recipients of a scholarship who are, in your committee’s opinion, equally qualified in light
of all the relevant selection criteria, awards are given in the following descending order of
preference:

• An applicant who is the child of a Y officer or employee who died while acting in
the course of his or her employment

• An applicant who is the child of a Y officer or employee who died while employed
by Y

• Applicant who has previously did not receive a Program grant

You will provide your committee with an annual budget for scholarships and an estimated
number of scholarships, based on your current assets and income. You will make awards
in the order recommended by your committee. The number of grants awarded may be
reduced by your board, but may not be increased from the number recommended by
your committee. Only your committee may vary the amounts of the grants awarded. In
addition, your committee may select a recipient for a one-year award or for a scholarship
to cover multiple academic years.

You will pay scholarships directly to the educational institution of the recipient. You will
require the educational institution receiving the scholarship to agree in writing to use
funds for educational purposes on behalf of the recipient. Further, the educational
institution shall agree in writing that in the event the recipient fails to satisfy the criteria
contained in the preceding sentence with respect to enrollment and standing, the
institution will return to you any portion of the grant not yet expended on behalf of or paid
to the recipient by the institution.

If you award a scholarship for a period of more than one academic year, the recipient
must remain in good academic standing to receive funds for a subsequent academic
year, and your committee may require the grantee to maintain a minimum grade point
average specified at the time of the grant award.

Your committee is composed of not fewer than three and not more than five individuals
selected annually by, and serving at the pleasure of your board. At least two members of
your committee shall be individuals knowledgeable in the field of education.

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No member of your committee may be one of your current or former officers or directors.
A committee member may not be a current or former officer, employee, or director of Y or
any other person who may have such a substantial personal or financial connection with
you or Y as would reasonably call into question the ability of that person to make
independent, objective, and nondiscriminatory decisions relating to the selection of
scholarship recipients.

X is designed to provide grants to the children of current or former employees of Y; X
shall also satisfy the requirements of Revenue Procedure 76-47 as follows:

• You or Y will not use the program as an inducement to recruit employees or to
induce employees to continue their employment with Y or otherwise follow a
course of action sought by Y.

• You will use a selection committee consisting wholly of individuals totally
independent (except for participation on the committee) and separate from you
and Y. At least two of the committee’s members must be individuals
knowledgeable in the education field, ensuring that the committee will have the
background and knowledge when evaluating the potential of the applicants. You
will announce the awards to the public and awarded in the order recommended by
the committee.

• You will impose identifiable minimum requirements for grant eligibility that are
related to the purpose of X and limits your committee’s consideration to those
applicants who meet the minimum standards for admission to an educational
institution described.

• You will satisfy one of the two alternative percentage tests as required by Revenue
Procedure 76-47. You will have Y employees who may have children eligible
complete an annual questionnaire used in determining the number of scholarships.

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

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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 will not 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
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.

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• 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.

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

Enclosures:
Notice 437
Redacted letter

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