Employer-related scholarship procedures received approval

Plain-English summary

A private foundation proposed scholarships for children and grandchildren of a company's employees to attend colleges, trade schools, vocational programs, or certificate programs. An independent committee drawn from regional school officials would select recipients using educational goals, character, work ethic, community service, recommendations, and other stated criteria unrelated to the employer's business. Awards would be paid directly to schools, could be renewed for up to three years, and would be monitored through enrollment records and case histories. The IRS approved the procedures under section 4945(g)(1), subject to the percentage limits and safeguards for employer-related scholarships in Revenue Procedure 76-47. It also concluded that awards used for qualified tuition and related expenses would not be taxable to recipients within section 117(b)'s limits.

Ruling snapshot

• Question: Did the employer-related scholarship program satisfy the objective-selection and percentage-limit rules for private foundations?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), 4946; 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: 201533020
Release Date: 8/14/2015 Employer Identification Number:
Date: May 18, 2015

Contact person - ID number:

Contact telephone number:

LEGEND: UIL: 4945.04-04
r dollars = dollar amount

s dollars = dollar amount

X= scholarship program

Y= company

Z= county board of educational services

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

You will operate an employer-related scholarship program called X, to provide access to
education and encourage the professional development of the children and grandchildren
of Y’s employees. To accomplish this purpose, you will provide financial assistance in
the form of scholarships to the children and grandchildren of Y’s employees for post-
secondary education in the United States, including two and four year colleges as well as
trade, vocational, and certificate granting programs. No scholarships will be issued to Y’s
employees.

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In the event that an employee of Y has more than one child or grandchild, all eligible
children and grandchildren of that employee may apply. Each applicant must submit his
or her own application and each application will be evaluated separately.

Children, grandchildren, or other close relatives of your officers, directors, substantial
contributors, and other individuals considered disqualified persons under Section 4946 of
the Code are not eligible for scholarships. Further, members of the selection committee
and their close relatives are not eligible for scholarships.

You will publicize X through several forms of communication to Y’s employees, which
may include email announcements, informational flyers in the workplace, direct mailing,
and posting an overview of X on Y's and your website. All communications will clearly
identify you as the grantor of the awards. The awarding of scholarships under X will be
publicized in Y’s newsletter.

The applicant will be required to complete a scholarship application, submit an essay or
personal statement, transcript, resume, three letters of recommendation, and may be
interviewed by one or more members of the selection committee.

The selection committee will review all applications and determine who will receive a
scholarship based on standards unrelated to the employment of the applicants’ parents
or grandparents and to Y’s line of business. Selection of recipients is based on several
specific criteria, including the applicant's educational goals and reasons the applicant is a
good candidate for scholarship support, evidence of positive character traits and strong
work ethic as evidenced by outside commitments, such as employment, dedication to his
or her community through volunteering in civic activities, and meeting other communal
responsibilities. In making the determination there will be no discrimination based on
race, national origin, religion, sexual orientation, or gender.

An awardee’s parent or grandparent must still be employed with Y at the time award
recipients are announced.

The number of scholarships awarded each year will be determined by the percentage
tests set forth in Revenue Procedure 76-47.

The amount of each scholarship will be determined exclusively by the selection
committee. You estimate scholarships under X to range in amount from r dollars to s
dollars per student annually. Scholarships must be made in the order recommended by
the selection committee. You reserve the right to decrease, but not increase, the number
of scholarships to be awarded under X in any given year. In addition, the selection
committee will consider each student’s cost of education (tuition, books, equipment, room
and board), the type of educational institution to be attended, and your resources to
determine the amount of each scholarship to be made under X, subject to the given
range.

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3

Applicants are required to be (or become) enrolled in a post-secondary educational
institution on a part-time or full-time basis. Scholarships are renewable for up to three
years. Each renewal of a scholarship is contingent on the recipient’s continued
enrollment and good standing in a post-secondary educational institution. If a recipient
fails to remain in good standing with his or her educational institution, the selection
committee may accommodate a recipient if such poor status is a result of extenuating
circumstances (for example, a temporary withdrawal due to the illness of a close family
member). Finally, renewals will not be conditioned upon the continued employment of
the recipient's parent or grandparent at Y.

You will disburse scholarship funds directly to educational institutions and will require
such institutions to return the funds if a scholarship recipient fails to enroll or drops out of
the institution’s program. In the event of a misuse of scholarship funds received under X,
you will determine if the situation is a mistake, whether it can be corrected, and then take
appropriate action. If it is determined that scholarship funds received under X have been
misused, you will seek the return of all or some of X scholarship funds and cease making
additional disbursements.

You will maintain detailed case histories. You expect to maintain these records for a
period of at least four years after the scholarship recipient has graduated from, or failed
to enroll in, the school he/she attended, or was expected to attend. You will periodically
review your case histories to evaluate the effectiveness and history of X.

Z is a regional permanent standing selection committee comprised of school
superintendents, principals, and guidance counselors. Z is operated independently of
you. Your selection committee will be comprised of a three member subset of Z. The
members of your selection committee will be appointed by Z, without your input, and the
composition of the selection committee will vary depending upon the availability of the
individuals serving on Z.

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

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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.

• 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

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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)
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