Employer-related scholarship procedures receive approval

Plain-English summary

A private foundation sought approval for scholarships serving eligible children of a company's employees and eligible full-time students who were themselves employees. Awards could support college, sports, art, dance, music, or academic enrichment and would be paid directly to the program or institution. An independent committee would evaluate essays, academic records, recommendations, and school and community activities, while excluding family members of foundation insiders and committee members. The program would comply with the employee-scholarship percentage limits in Revenue Procedure 76-47, would not be used to recruit employees, and would not end an award merely because employment later ended. The IRS approved the procedures under section 4945(g)(1).

Ruling snapshot

• Question: Do the independent selection, percentage-limit, payment, and monitoring procedures qualify for approval of an employer-related scholarship program?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)(1); Rev. Procs. 76-47 and 85-51

Full text (IRS public release)

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

Release Number: 201509054
Release Date: 2/27/2015 Employer Identification Number:
Date: December 8, 2014

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

B= scholarship program
X= award name

Y= company

Z= country

n = age range

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.
You are planning to help some of the well deserving kids of Y employees pursue their
interests or academic goals.

You will be awarding scholarships to support kids’ fees for college, sports, art, dance,
music or academic enrichment. You want to give children of Y employees the chance to
experience new and interesting activities as well as support their academic goals.

Letter 4793 (10-2012)
Catalog Number 58264E

Applicants must be age n, enrolled full-time in school, and currently living in the Z. The
parent or legal guardian must be employed by a participating Y store. The employee can
be part-time or full-time and must be active on payroll for at least six months prior to the
submission date of the application. Minor entrants must also have written consent of a
parent or legal guardian. Full-time students who are Y employees are also eligible.

Family members of officers, directors, major contributors of the Foundation, and selection
committee members are ineligible for scholarships.

You will put together a selection committee independent of you and Y who will judge the
entries based on each student’s essay, academic record, recommendation, and
participation in school and community activities. You may conduct an interview for a
larger scholarship amount.

Applicants who provide the following information will warrant consideration:
• Most current report card or school transcript
• Address and contact information for the program your child wishes to participate
• A copy of your current Y pay stub

• A recommendation from an adult (preferably a teacher/coach/pastor/advisor) not
related to the student

• An essay on, “How would the B make a difference in my life?”

You will notify applicants of their awards and the procedure to follow to receive
scholarship monies. You will make the awards on an individual basis. You will mail
awards directly to the program or institution the applicant is attending. You will award
scholarships solely in the order recommended by the selection committee, and the
scholarship award amount will be fixed. No one on the selection committee will have the
power to increase the number of scholarships after the committee has made its selection.
You will not terminate a scholarship because the recipient or the recipient’s parents
terminate employment subsequent to the awarding of the scholarship.

You will investigate any misuse of funds and will withhold further payments
if it is found the funds awarded are not being used for the purposes for which the grant
was made. You will also take all reasonable steps to recover any funds and ensure
restoration of such funds. You will maintain records related to the grants to individuals.

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

Letter 4793 (10-2012)
Catalog Number 58264E

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 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.

Letter 4793 (10-2012)
Catalog Number 58264E

• 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::

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

Letter 4793 (10-2012)
Catalog Number 58264E