Employer and carrier scholarship procedures receive advance approval

Plain-English summary

A private foundation asked for advance approval of an employer-related scholarship program for domestic and international company employees, employees of qualified truckload contract carriers, and their eligible dependent children. The program supports undergraduate study, and an independent third party selects recipients based on academic performance, leadership, activities, work experience, goals, personal circumstances, and an outside appraisal without considering financial need. Awards are nonrenewable, although eligible students may reapply, and payments go directly to schools with enrollment checks, annual reports, and recovery procedures. The program must comply with the employee and employee-child percentage limits in Revenue Procedure 76-47, as clarified by Revenue Procedures 81-65 and 85-51. The IRS approved the procedures under section 4945(g)(1), so grants made under them would not be taxable expenditures and could qualify for exclusion under section 117 when used for qualified tuition and related expenses.

Ruling snapshot

• Question: Did the foundation's procedures for employer-related undergraduate scholarships satisfy the advance-approval rules for grants to individuals?
• Outcome: Approved.
• Key authorities: IRC §§ 117(a), 170(b)(1)(A)(ii), and 4945(g)(1); Rev. Procs. 76-47, 81-65, and 85-51.

Full text (IRS public release)

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

Number: 201516067 Employer Identification Number:

Release Date: 4/17/2015
Contact person - ID number:

Contact telephone number:
Date: 1/20/2015

LEGEND UIL: 4945.04-04

X = Scholarship program
Y = Company

Z = Third-party

b = Number

c = Number

d dollars = Dollar amount
e = Number

f = Number

g dollars = Dollar 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)).

Letter 4793 (10-2012)
Catalog Number 58264E

Description of your request
You will operate an employer-related scholarship program called X and will award
scholarships for post-secondary education.

Grants will be made to eligible domestic and international employees of Y and their
eligible dependent children as well as eligible employees of qualified employees of
truckload contract carriers of Y and their eligible dependent children. You will award up
to f scholarships of g dollars each academic year to pay tuition at qualified post-
secondary institutions in order to assist the students who receive the scholarships to
pursue their educational studies. The amount of each scholarship may be adjusted in the
future for inflation. Y has over b employees and over c carriers.

Consistent with the requirements of Revenue Procedure 76-47, as clarified by Revenue
Procedure 81-65, you will publicize your scholarship program by:

• An announcement by you to all employees of Y

• An announcement by you to carriers for forwarding to their employees

• One or more press releases by you

• Brief announcements and descriptions of your program, including scholarship and
application availability and announcements that scholarships have been awarded
on the Y website and social media site with links to your website or social media
sites for more detailed information

• Inclusion of such brief announcements and descriptions of the Foundation's
Program in regular electronic communications to all employees (which take the
place of a Company newsletter)

• A link on your website to the website of Z, which through its division, has
contracted with you to manage certain aspects of your scholarship program for
you. Certain program information and application materials will be posted on the Z
website. You and/or Z will make announcements of the awards, and in all cases,
you will be clearly identified as the grantor of the awards

Applicants must meet all of the following criteria:

• Be high school seniors or graduates or be current postsecondary undergraduates.
Students outside the United States must be in their final year of upper or higher
secondary school or be current technical or university level students.

• Plan to enroll in full-time undergraduate study for the applicable academic year at
an accredited or bona-fide college, university or vocational-technical school that
normally maintains a regular faculty and curriculum and normally has a regularly
enrolled body of pupils or students in attendance at the place where its
educational activities are regularly carried on, except that Y employees are eligible
to be enrolled part-time. Grant recipients may pursue any field of study. Awards
are for undergraduate study only.

Letter 4793 (10-2012)
Catalog Number 58264E

• Satisfy one of the following requirements:

(i) Be regular full-time employees of Y with at least one year of employment with Y
as of the application deadline date; or

(ii) Be dependent children, age 24 and under, of full-time Y employees with at least
one year of employment with Y as of the application deadline date; or

(iii) Be regular full-time employees of a carrier with at least one year of
employment with the carrier as of the application deadline date; or

(iv) Be dependent children, age 24 and under, of full-time carrier employees with
at least one year of employment with the carrier as of the application deadline
date.

For purposes of this requirement, "dependent children" means biological children,
stepchildren, and adopted children living in the employee's household or primarily
supported by the employee.

You will use standard Z recipient selection procedures including the consideration of
academic performance, demonstrated leadership and participation in school and
community activities, work experience, a statement of career and educational goals and
objectives, unusual personal or family circumstances and an outside appraisal. Academic
evaluation of international applicants will include a review of the grade/mark average
based on the grading system used in the applicant's country and a review of the results
of academic examinations. You will not consider financial need. If a sufficient number of
qualified applicants are present, recipients from outside the United States and Canada
will be selected in proportion to the number of eligible applicants.

Awards are not renewable, but students may reapply to your scholarship program each
year they meet the eligibility requirements.

You have authorized d dollars in scholarships of g dollars each for each academic year,
provided there is a sufficient number of eligible recipients. You intend that e scholarships
will be awarded each year to Y employees or their children and e scholarships will be
awarded each year to carrier employees or their children. If there are not enough
qualified applicants in either group, awards could be allocated to the other group in order
to award f scholarships for the year, subject to following limitations:

(a) The number of grants awarded in any year to children of Y employees does not
exceed 25 percent of the number of Y employees' children who (i) were eligible, (ii)
were applicants for such grants, and (iii) were considered by Z in selecting the
recipients of grants in that year;

(b) The number of grants awarded in any year to children of Y employees and
children of carrier employees combined does not exceed 25 percent of the number

Letter 4793 (10-2012)
Catalog Number 58264E

of such children who (i) were eligible, (ii) were applicants for such grants, and (iii)
were considered by Z in selecting the recipients of grants in that year; and

(c) The number of grants awarded in any year to Y employees does not exceed 10
percent of the number of Y employees who (i) were eligible, (ii) were applicants for
such grants, and (iii) were considered by Z in selecting the recipients of grants in
that year.

Checks are made payable to the educational institutions, and Z verifies enrollment with
the respective educational institutions.

Z will require scholarship recipients to agree to submit at the end of each academic year
a report verified by the educational institution of the student's courses taken and grades
received in each academic period. You or Z will review such reports for compliance. In
the event that you or Z discovers a violation in the terms of the grant, they will take
reasonable steps to recover the funds.

You will maintain all records relating to individual grants, including information obtained to
evaluate grantees, identify whether a grantee is a disqualified person, establish the
amount and purpose of each grant, and establish that you properly supervise and
investigate grants.

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
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:

Letter 4793 (10-2012)
Catalog Number 58264E

• 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.

• 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.

Letter 4793 (10-2012)
Catalog Number 58264E

• 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.

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)
Catalog Number 58264E