Employer-related scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed scholarships for full-time employees of two related companies and for eligible dependent children of those employees. Officers, directors, and their children were excluded, and an independent nonprofit administrator would select recipients without involvement from the foundation or the employers. Selection would focus on academic achievement, leadership, community activity, work experience, goals, and outside appraisal rather than financial need. The foundation represented that it would satisfy the employee and employee-child percentage limits, supervise grant use, investigate diversions, recover misused funds, and retain records. The IRS approved the procedures under section 4945(g)(1), so awards made under them would not be taxable expenditures. The approval remains effective only while the program complies with the conditions and percentage tests described in the ruling.

Ruling snapshot

• Question: Do the proposed employer-related scholarship selection and supervision procedures satisfy section 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g); Rev. Procs. 76-47, 80-39, 85-51

Transcription note: this is a scanned document (5 PDF pages) transcribed by OCR and proofread against every page image. Repeating form footers are retained, page markers have been added, and obvious OCR misreads were corrected from the official scan.

Full text (IRS public release)

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

Number: 201528041
Release Date: 7/10/2015 Employer Identification Number:

Contact person - ID number:

Date: April 16, 2015
Contact telephone number:

UIL: 4945.04-04
LEGEND

g dollars = Amount

P = Scholarship Program

Q = Scholarship Program Administrator
X = Grant Making Program

Y = Company

Z = Company

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(c)).

Description of your request

You will operate a scholarship program called X. The purpose of X is to award a
scholarship based on scholastic achievement, demonstrated leadership and participation
in school and community affairs. The awards cover all forms of accredited post high
school education, including colleges, universities, and vocational and technical schools.

The following persons are eligible to participate in the scholarship program:

Letter 4793 (10-2012)
Catalog Number 58264E

[Page 2]

• A dependent unmarried child of any current regular full-time employee of Y and its
subsidiary, Z, (excluding officers and directors of Y or its subsidiary) is eligible to
participate if the employee has worked for Y or its subsidiary at least one
continuous year as of the application deadline date; and

• A current regular full time employee of Y or Z (excluding officers and directors of Y
or its subsidiary) is eligible to participate if the employee has worked for Y or its
subsidiary at least one continuous year as of the application deadline.

Dependent child, for purposes of the scholarship program, is defined as any natural child,
legally adopted child, stepchild, dependent grandchild and any other child which the
employee has been appointed as their legal guardian who is under the age of 25.

Dependent, for purposes of the scholarship program, means a child living in the
employee’s household or primarily supported by the employee’s household or primarily
supported by the employee and claimed as a dependent on the most recent federal
income tax return of the employee.

Applicants should also have a high school diploma or its equivalent (or have the
expectation of receiving it during the current calendar year) and be planning to enroll or
already be enrolled in post high school studies on a full-time basis.

A dependent child who has worked part-time for Y or Z shall be eligible to participate.
Additionally, children whose parents are officers or directors of Y or its subsidiary are not
eligible for these awards. A family may be awarded only one scholarship per year.

The awards are for g dollars per year and are available for up to four years for each
recipient for tuition or school related fees and expenses for study in any accredited post
high school education program. Up to seven such awards will be made this year.

The award will cover one year of full-time graduate or undergraduate study. Awards will
be paid in two equal installments per academic year.

This scholarship program is administered by Q, a department of P. P is a national
nonprofit educational support and student aid service organization that seeks to involve
and assist the private sector in expending educational opportunities and encouraging
educational achievement. P is an independent organization and no members of its staff
or board are connected with Y. P shall interpret the provisions of the scholarship award
program; reconcile any inconsistency; and make all other determinations necessary or
advisable for the proper administration of the scholarship award program.

Scholarship recipients are selected on the basis of academic record, potential to
succeed, leadership and participation in school and community activities, honors, work
experience, a statement of educational and career goals, and outside appraisal. Financial
need is not considered.

Letter 4793 (10-2012)
Catalog Number 58264E

[Page 3]

Selection of recipients is made by P. In no instance does any officer or employee of you,
Y, or Z play a part in the selection. All applicants agree to accept the decision of P as
final.

Students may reapply to the program each year they meet eligibility requirements. The
awards will be available for up to four years per recipient. Awards are renewable on the
basis of each recipient's continued scholastic achievement and demonstration of
leadership qualities and satisfaction of all eligibility requirements.

A recipient may select any accredited post high school institution. This means the award
is good not only for a four-year college, but also for any accredited two-year college or
trade school. Likewise, the award places no restrictions on choice of study.

To apply, the student must provide an application along with a current official transcript of
grades. The completed application form and all other required pieces of information as
note on the application must be mailed to P by the annual deadline.

You will comply with the seven conditions and either the percentage tests or facts and
circumstances test for scholarships, fellowships and educational loans to attend an
educational institution as set forth in Revenue Procedures 76-47 and 80-39. You will
award grants to 10% or fewer of the eligible applicants of employees of Y and Z who are
actually considered by the selection committee when selecting recipients of grants in that
year. You will also award grants to 25% or fewer of the eligible applicants of children of
employees of Y and Z who are actually considered by the selection committee when
selecting recipients of grants in that year.

You will arrange to receive and review grantee reports annually and upon completion of
the purpose for which the grant was awarded. You will investigate diversions of funds
from their intended purposes. You will take all reasonable and appropriate steps to
recover diverted funds, ensure other grant funds held by a grantee are used for their
intended purposes, and withhold further payments to grantees until you obtain grantees’
assurances that future diversions will not occur and that grantees will take extraordinary
precautions to prevent future diversions from occurring.

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.

Letter 4793 (10-2012)
Catalog Number 58264E

[Page 4]

• 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
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

[Page 5]

• 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.

We've 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