Former-employee scholarship procedures approved

Plain-English summary

A private foundation proposed scholarships for certain former company employees, their spouses, and their descendants. Applicants had to attend an eligible educational institution, show financial need, meet a minimum grade-point average, and be a U.S. citizen or permanent legal resident. An independent committee would weigh financial need, academics, leadership, recommendations, and commitment to education, while excluding disqualified persons and committee members' families. The IRS approved the procedures under section 4945(g)(1), so compliant awards would not be taxable expenditures and could qualify for the section 117 exclusion when used for qualified tuition and related expenses.

Ruling snapshot

• Question: Do the foundation's proposed former-employee scholarship procedures satisfy the advance-approval rules for grants to individuals?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), 4946

Full text (IRS public release)

Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Department of the Treasury

Release Number: 201535021
Release Date: 8/28/2015
Date: June 1, 2015

Employer Identification Number:

Contact person - ID number:

Contact telephone number:

LEGEND:

B= company
C= individual

D = date

z dollars = dollar amount

UIL:
4945.04-04

Dear

You asked for advance approval of your 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 scholarships. Based on the information
you submitted, and assuming you will conduct your program as proposed, we
determined that your procedures for awarding 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 provide in Code section 117(b)).

Description of your request

You will operate a scholarship program to benefit the former employees of B who worked
at B up until the time (D) of C’s retirement; the founder of you and B. C’s motivation for
creating this scholarship is to assist B’s former employees (and their families). It is
anticipated that the total amount of scholarships awarded in any calendar year under the
proposed program will not exceed z dollars.

The class of eligible scholarship recipients will comprise the following:

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1. All individuals who were employed by B on or before D, and who were in B’s
   service for at least three years before that date;

2. Spouses of such employees; and

3. Children, grandchildren, and great grandchildren of such employees.

The total number of eligible employees is approximately 1000. The size of the entire
beneficial class is even larger, however, because the class includes the spouses and
descendants of such eligible employees.

In order to apply for scholarships, prospective applicants must also satisfy the following
criteria:

• Be currently enrolled at, or accepted to attend, an accredited college, university,
trade or commercial school, or similar educational institution described in §
170(b)(1)(A)(ii);

• Demonstrate financial need, as evidenced by the applicant’s tax returns,
statements of assets and gross income, information contained in the Free
Application for Federal Student Aid (FAFSA), and other financial documentation;

• Maintain a minimum grade point average of 2.0, if currently attending high school
or another educational institution; and

• Be a US citizen or permanent legal resident.

Each applicant will be required to submit an application including the following materials:

• High school and college transcripts (if available);

• A completed FAFSA form;

• A resume;

• Proof of current employment, if applicable; and

• A personal letter written by the applicant describing his or her
educational/training goals and motivation for additional learning.

You will in no event make scholarship grants to (1) “disqualified persons” with respect to
you (within the meaning of § 4946) or (2) the members of the independent selection
committee (and their family members).

Recipients will be selected objectively related to your educational purposes and taking
into account:

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• Financial need

• Academic achievement

• Leadership and extracurricular activities

• Academic and professional recommendations

• Commitment to educational advancement

Recipients will be chosen by an independent selection committee of local leaders and
experts in their field. Currently there are three committee members.

Your program will be publicized through mailings to former employees and by word of
mouth.

Each award will be for one year and may be renewed through the application process for
up to four years of funding. It is anticipated funds will be used to defray educational
related expenses. You will maintain records relating to awards including applications,
recipients, any relationship of a recipient to you, reports from recipients, and applicants
who were not selected. You will require recipients to annually report to you on fund use.

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 the provisions of 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).

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 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

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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 4792 (10-2012)
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