Independently administered employee-child scholarships approved

Plain-English summary

A private foundation proposed scholarships for dependent children of longer-serving full-time employees of a company. A separate public charity would administer the program, receive applications directly, independently select recipients, pay awards, verify enrollment, and report program results. Selection would consider academics, leadership, community activity, work experience, financial need, goals, and an outside appraisal. The IRS approved the procedures under section 4945(g)(1), subject to the employer-related scholarship safeguards and percentage tests in Revenue Procedure 76-47. The program also required recordkeeping, excluded children of foundation officers and directors, and could not be used to recruit or retain employees or steer recipients toward studies benefiting the employer.

Ruling snapshot

• Question: Did the independently administered scholarship program for employees' dependent children satisfy the private-foundation grant rules?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1); Rev. Proc. 76-47; Rev. Proc. 85-51

Full text (IRS public release)

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

Release Number: 201533018
Release Date: 8/14/2015 Employer Identification Number:
Date: May 18, 2015

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

X= Program
Y= Employer
Z= Name

b= Number
c= Number
d= Number

f dollars = Amount
g dollars= 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(c)).

Description of your request

Letter 4793 (10-2012)
Catalog Number 58264E
Your letter indicates you will operate an employer-related scholarship program called X.
X’s purpose is to assist deserving students who are children of employees of Y in
pursuing higher education by granting scholarships to qualified recipients to attend a two-
year or four-year college, university or vocational/technical school. X will be advertised on
Y’s intranet, at Y’s company benefit meeting, and in Y’s New Employee Benefit Book.

The scholarship is a fixed award for f dollars for those attending two-year schools and for
g dollars for those attending four-year schools. Students receiving f dollars may receive
the award up to two years or until a certificate or an Associate’s Degree is earned,
whichever occurs first while students receiving g dollars may receive an award up to four
years or until a Bachelor's Degree is earned whichever occurs first. The number of
grants will be determined by the amount funded, the number of grants awarded to
students attending two-year schools and the number of grants awarded to students
attending four-year schools.

Applicants must be dependent children, age 24 and under, of full-time Y employees who
have a minimum of three year’s employment with the company as of the application
deadline date as well as must be:

• High school seniors or graduates who plan to enroll or students who are
already enrolled in full-time undergraduate study at an accredited two-year
or four-year college, university, or vocational-/technical school for the entire
upcoming academic year.

• Have a minimum grade point average of b on a 4.0 scale (or its
equivalent).

Any child of an officer or director of your organization will not be eligible to apply for the
scholarship.

The awards are not renewable but students are eligible to reapply every year they meet
the eligibility criteria; however, if an individual receives an award, the recipient will not be
considered ineligible to reapply if the recipient’s parent is no longer employed by Y.

You submitted an agreement that X will be administered, supervised, and paid out by Z.
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, Z is responsible for the following:

• Management of the scholarship program according to the conditions outlined in
the program description.

• Design and production of application materials as requested by Y.

• Forwarding application materials electronically to Y.

• Receipt, acknowledgment, and processing of all application materials.
• Evaluation of applications.

• Selection and notification of recipients.

• Notification of non-recipients.

Letter 4793 (10-2012)
Catalog Number 58264E

• Confirmation of school enrollment.
• Payment of awards to student recipients.
• Providing management reports to summarize program activity and results.

Under this agreement, Y is responsible for:

• Specification of the eligibility guidelines for X.

• Approval of application materials.

• Placement of materials on Y’s website.

• Promotion of the scholarship among the eligible group.

• Verification of recipient eligibility.

• Providing the full amount of the scholarship distribution and management fee.

Applicants will send their applications directly to Z so the selection process is completely
independent of you. Selection of recipients will be based on consideration of past
academic performance and potential, leadership and participation in school and
community activities, work experience, demonstrated financial need, statement of career
and educational aspirations and goals, and an outside appraisal from a high school or
college counselor or advisor, an instructor or work supervisor.

Your program will be conducted in accordance with all of the guidelines of sections 4.01
through 4.07 of Revenue Procedure 76-47. You have agreed that your program will
generally meet the requirements of either the 25 percent or 10 percent percentage test of
Section 4.08 Revenue Procedure 76-47. However, you have the potential of not meeting
the percentage test so you are working to increase the number of applicants in several
ways including extending the application window by two weeks as well as considering
lowering the grade point average to d. Moreover, you currently have identified that there
are c children and/or dependents of eligible employees between the ages of 17-24;
promotional materials will be sent directly to these individuals.

Based on the wide availability of the scholarship program to all employees’ children you
have demonstrated that the recipients will not be drawn from a specific group of
employees. In particular, the selection of individual grant recipients will be made by Z.
The grants will not be used as a means of inducement to recruit employees nor will a
grant be terminated if the employee leaves the employer. The recipient will also not be
restricted in a course of study that would be of particular benefit to Y or to you.

Z will collect information regarding your program and you agree to maintain certain
information about your program in accordance with Code Section 4945(d)(3), including

the following:

• The information used to evaluate the qualifications of potential grantees;

• Identification of the grantees (including any relationship of any grantee to the
private foundation), the amount and purpose of each grant;

• All reports and other follow-up data obtained in administering your scholarship
program.

Letter 4793 (10-2012)
Catalog Number 58264E

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).

• Use of the scholarship 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 will not exceed 10 percent of the number of employees who
are eligible for grants, applicants for grants, and 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.

Letter 4793 (10-2012)
Catalog Number 58264E

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 and not cited as a precedent.

• You cannot rely on the conclusions in this letter if the facts you provided have
changed substantially. You may report any significant changes to your program by
completing Form 8940 and sending it 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.

• You will distribute funds to individuals 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.

Letter 4793 (10-2012)
Catalog Number 58264E

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