Employer-related scholarship procedures approved

Plain-English summary

A private foundation proposed scholarships for employees and children of employees connected with a large membership organization and related employers. Eligibility and selection are based on academic performance, potential, leadership, activities, work experience, and career goals, without regard to financial need or the employer's line of business. Awards cannot be used for recruiting or retaining employees, do not require future service, and cannot restrict recipients to fields benefiting the employer. An independent public charity administers the program, chooses a separate education-focused selection committee, pays awards, monitors performance, and investigates misuse. The foundation also represented that awards will satisfy the employee and employee-child percentage limits in Revenue Procedure 76-47 and the relevant eligibility rules in Revenue Procedure 85-51. The IRS approved the procedures under section 4945(g)(1).

Ruling snapshot

• Question: Do the employer-related scholarship procedures satisfy section 4945(g)(1) and the safeguards for employee scholarship programs?
• Outcome: Approved.
• Key authorities: IRC §§ 117(a), 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: 201517020 Employer Identification Number:
Release Date: 4/24/2015

Date: 1/27/2015 Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

M = Scholarship Program
N = Organization
P = Organization

Q = Amount

R = Organization
S = Number

X = State

Y = Number

Z = Organization

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 won't 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 M.

Letter 4793 (10-2012)
Catalog Number 58264E

The purpose of M is to provide scholarships to deserving students who are members of
N. N is a 501(c)(5) organization with in excess of 360,000 members. Up to S awards in
the amount of Q will be awarded annually. Employees and children of employees of P, its
subsidiaries, affiliates, and/or sponsoring organizations, as well as of R, are eligible
applicants. Employees must have a minimum of one year of employment as of the
application deadline date. There are currently 24 organizations that are subsidiaries,
affiliates, and sponsoring organizations of P. P, R, and N will publicize scholarship
materials in company publications. The M will not be used by P, any subsidiaries,
affiliates and/or sponsoring organizations of P, or the R, to recruit employees or induce
employees to continue their employment.

Applicants must be high school seniors, graduates, or current postsecondary
undergraduates enrolled or planning to enroll in a full time accredited program at a two or
four year college, university, or vocational-technical school located in the state of X,
which constitutes an educational organization described in section 170(b)(1)(A)(ii) of the
Internal Revenue Code. . Applicants must have a minimum grade point average of Y.

Recipients of M will be selected based upon standards that are unrelated to the
employment of the recipients’ parents or the line of business of R, P, and any
subsidiaries, affiliates, and/or sponsoring organizations of P. Additionally, courses of
study of recipients are not limited to those that would be of a benefit to R, P, and any
subsidiaries, affiliates, and/or sponsoring organizations. The selection criteria will include
past academic performance, future potential, leadership, participation in school and
community activities, work experience, and a statement of career and educational goals
and objectives. Financial need will not be considered.

When an M grant is awarded, there will be no requirement that the recipient or parent is
expected to render future employment services to R, P, or any subsidiaries, affiliates,
and/or sponsoring organizations. The grants are not automatically renewable, but
applicants may re-apply for grants for up to three successive years or until a bachelor's
degree is earned, whichever is first. The standards for re-application will be based solely
on non-employment related factors.

You have entered into an agreement with Z to administer M. 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. Z will prepare and furnish application
forms, receive all applications, determine the recipients, notify the recipients of the award,
confirm enrollment in an educational institution, and make payment of the award. Z will
publicize the M by providing a publicity blitz to guidance counselors. Z will choose the
selection committee and it will be made up of individuals who are knowledgeable in the
education field and who have the background and knowledge to properly evaluate the
potential of applicants. The selection committee will be totally independent and separate
from R, P, and any subsidiaries, affiliates, and/or sponsoring organizations of P. Z will
also obtain reports that determine whether the grant recipient has performed the activities
that the grant was intended to finance and Z will investigate any possible misuse of funds

Letter 4793 (10-2012)
Catalog Number 58264E

by the recipient , withhold any further funds during the investigation if a misuse is
discovered, and seek the recovery of any misused funds.

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:

• 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 won't 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

Letter 4793 (10-2012)
Catalog Number 58264E

4

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
don't 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.

Letter 4793 (10-2012)
Catalog Number 58264E

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