Employer-related scholarship procedures approved

Plain-English summary

A tax-exempt private foundation asked the IRS to approve procedures for scholarships benefiting children of employees in specified divisions of an employer. An independent committee would select recipients using academic performance, aptitude, recommendations, motivation, and character, while grants would be paid directly to educational institutions. The program limited awards under the percentage tests for employer-related scholarships, barred grants to disqualified persons, and required monitoring and recovery procedures. The IRS approved the procedures under section 4945(g)(1), so compliant grants would not be taxable expenditures and could be excluded from recipients’ income when used for qualified tuition and related expenses.

Ruling snapshot

• Request: Advance approval of employer-related scholarship grant procedures
• Outcome: Approved, subject to operating the program as represented
• Key authorities: I.R.C. §§ 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: 201543020
Release Date: 10/23/2015                         Employer Identification Number:
Date: July 27, 2015

                                                Contact person - ID number:

                                                Contact telephone number:

LEGEND                                          UIL: 4945.04-04

M = Employer Name
N = Division Name
P = Division Name
Q = Division Name
R = Division Name
S = Division Name
w = Number
x = Number
y dollars = Amount
z 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(b)).

Description of your request

You are operating an employer related scholarship program. You will award grants only
to applicants intending to pursue or to continue to pursue a full-time course of study at an
educational institution of higher learning that normally maintains a regular faculty and
curriculum and normally has a regularly enrolled body of students in attendance at the
place where its educational activities are regularly carried on. The course of study must
lead to credits toward a Bachelor of Arts degree (or its equivalent). No limitation is placed
on the particular area of study pursued by a potential recipient of a grant, so long as it
leads to such credits toward a degree for a qualified academic program.

Candidates for grants will be male and female high school seniors, college
undergraduates or others who intend to begin or continue a qualified academic program
and who meet (or have met) minimum standards for admission to an institution
conducting such a program. Except for grant renewals, eligibility for a grant for a
particular academic year will be limited to children (by birth or legal adoption) of a parent
who has been employed on a full-time basis for at least one year (and continues on the
relevant date to be so employed) by a department, division or direct or indirect subsidiary
of M that your Board of Directors has specified to be included in the program at the time
of the application for a grant. Currently, the departments, divisions and/or direct or
indirect subsidiaries of M so included (Included Divisions) are N, P, Q, R, S and, to the
extent not otherwise included therein, the shared services and corporate functions
departments of M.)

In particular, children of such full-time employees of Included Divisions of M are eligible
without regard to (i) the length of employment of the parent in excess of one year, or (ii)
the position, services, or duties of the parent. Applicants are eligible without regard to
sex, race, creed, color, national origin or sexual orientation. Individuals who are
disqualified persons (within the meaning of section 4946 of the Internal Revenue Code of
1986 as amended (the Code)) with respect to you will not be eligible for grants.

An unsuccessful applicant for a grant may reapply in the following year so long as such
individual would otherwise then be an eligible applicant.

A three-person selection committee chosen by you will choose recipients from the pool of
applicants. Each of the three persons on the selection committee:

(1) will be knowledgeable in the education field and will have the background and
knowledge to properly evaluate the potential of the applicants, (2) will not, and will never
have been, associated (by employment or otherwise) with M (or any direct or indirect
subsidiary), (3) will have no connection whatsoever with you except for his or her
participation as a member of the selection committee, and (4) will not be in a position to
derive (directly or indirectly) a private benefit if certain potential recipients are selected
over others.

The selection committee will choose from among the eligible applicants based on the
following criteria:
    (i) prior academic performance;
    (ii) performance on standardized examinations designed to measure ability and
         aptitude for higher education;
    (iii) recommendations from teachers or other individuals not related to the applicant
          (but in no event from employees of M (or any direct or indirect subsidiary) or other
          persons related to M (or to any direct or indirect subsidiary)); and
    (iv) conclusions as to motivation and character drawn from information on the
         application form about the applicant’s extracurricular activities and employment
         experiences. The selection committee also may choose to require an interview of
         an applicant.

Each grant will be made directly to the educational institution attended by the recipient to
defray expenses of tuition and academic fees of the qualified academic program. The
purpose of the grant is to assist the recipient in obtaining an education in his individual
capacity and solely for his personal benefit.

Your Board will determine the number of grants available for award each year and may
limit the number available by Included Division. Commencing for the current academic
year, w grants will be made available, of which x will be reserved for children of eligible
employees of the R, x will be reserved for children of the remaining Included Divisions,
and the balance will be awarded by the selection committee in its discretion to children of
eligible employees in any of the Included Divisions.

Subject to the penultimate sentence of this paragraph, the basic amount of each grant
will be 75% of the tuition and academic fees of the institution actually attended by the
recipient during the academic years for which the grant is made and renewed. However,
subject to the penultimate sentence of this paragraph, the amount of the grant will be
100% of such tuition and academic fees if the compensation paid to the employee-parent
during the calendar year preceding the grant, as reflected on the parent’s Form W-2, is
less than a specified amount (currently y dollars), which may be changed by you each
year in advance of the determinations of the selection committee. Notwithstanding the
foregoing, you have established a maximum grant of z dollars per academic year for
children of eligible employees of the R and such maximum amount, which the Board may
in its discretion increase or decrease, shall also apply to all children of any eligible
employee first employed by an Included Division (or any direct or indirect subsidiary). The
Board will not decrease the maximum grant for a recipient after the grant has been
awarded.

Each grant is made for the next succeeding academic year only. However, each grant
may be renewed for any following year in which the recipient is enrolled in a qualified
academic program. The renewal of a grant will depend only upon the maintenance of
satisfactory academic performance by the recipient and will not depend on the continued
employment of the recipient’s parent by M (or any direct or indirect subsidiary) (or within
an Included Division). Furthermore, the percentage, and any maximum dollar amount of a
renewal grant will be the same as that of the original grant.

The number of original grants to be awarded each year will not exceed the greater of (i)
25% of the number of eligible applicants for grants and (ii) 10% of the number of eligible
children of employees of the Included Divisions of M without regard to the number of
applications. (In any year in which you propose to rely on the 10% test in order to award
a number of original grants greater than 25% of the number of eligible applicants, a
survey will be conducted by M to determine the number of eligible children who evidence
intention to enroll in a qualified academic program.) In applying these tests, renewals of
grants awarded in prior years will not be considered in determining the maximum number
of grants awarded in a current year. That is, the number of applicants for renewals of
grants will not be included in either the numerator (number of grants awarded) or the
denominator (number of eligible applicants) of the fraction used in determining
satisfaction of the 25% or 10% tests. The selection committee may in its discretion
reduce the number of grants awarded to a number less than the maximum as so
computed.

The selection committee will forward its list of proposed recipients to you for verification
of satisfaction of eligibility requirements. The grants will be awarded by you in the order
recommended by the selection committee. Any public announcement of the grants will be
made either by the selection committee or by you.

You will make payment of the grant directly to the educational institution attended by the
recipient. The institution will be instructed to credit the payment against tuition and
academic fees owing by the recipient only upon a determination that the recipient is
enrolled as a full-time degree candidate in good standing at the institution.

You will arrange to receive at least annually a report of the recipient’s courses taken (if
any) and grades received (if any) in each academic period. In the case of a recipient who
is in an academic program for which grades are not given, you will arrange to receive a
brief progress report by a faculty advisor or other appropriate university official. Each
recipient of a grant will be deemed to have waived any applicable privacy or other legal
restriction on your ability to receive a report of the recipient’s courses taken (if any),
grades received (if any) or progress report and the recipient shall upon your request
execute any documentation required to permit you such access.

A recipient will be requested to ask an appropriate university official to send the above-
mentioned reports to you.

The reports described above will be reviewed by one of your officers and retained in your
files. If such reports or other information indicates that a grant is not being used in
furtherance of the educational purposes for which the grant is made, you will investigate,
generally by contacting both the recipient and the educational institution involved.

While conducting your investigation, you will withhold further payments to the extent
possible until you have determined that no part of the grant has been used for improper
purposes and that it appears likely that no part of the grant will be so used in the future. If
you determine that any part of the grant has been used for improper purposes, you (i) will
take all reasonable and appropriate steps either to recover or to ensure the restoration of
any improperly diverted funds; (ii) will withhold any further payments under such grant
until you have received the recipient’s assurances that future diversions will not occur,
and (iii) will require the recipient to take extraordinary precautions to prevent future
diversions from occurring.

You will keep on file the following information:

    (i) all information secured by you or by the selection committee that is used in
        evaluating the qualification of potential recipients;

    (ii) identification of applicants (including any relationship of any applicant to you
         sufficient to make a determination as to whether the applicant is a “disqualified
         person” with respect to you for purposes of the Code);

    (iii) specification of the amount and purpose of each grant; and

    (iv) any follow-up information obtained by you about any recipient with respect to his
         or her continued eligibility to receive his or her grant and renewals thereof.

Additional characteristics of the scholarship program

1. The scholarship program will not be used by you or by M to recruit employees or to
induce employees to continue their employment or otherwise to follow a course of action
sought by M (or any direct or indirect subsidiary).

2. A grant will not be terminated because of the termination of employment of the
recipient’s parent with M (or of a direct or indirect subsidiary), regardless of the reason of
such termination of employment.

3. At the time each grant is awarded or renewed, there will be no requirement, condition
or suggestion, express or implied, that any recipient or parent is or will be expected to
render future employment services for you or M (or any direct or indirect subsidiary), or be
available for such future employment.

4. The terms of each grant will not include any commitments, understandings or
obligations, conditional or unconditional, suggesting that the studies are undertaken by
the recipients for the benefit of M (or any direct or indirect subsidiary) or you or have as
their objective the accomplishment of any purpose of M (or any direct or indirect
subsidiary) or you other than enabling the recipients to obtain an education in their
individual capacities and solely for their personal benefit.

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 will not 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 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. 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 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.

If you have questions, please contact the person listed at the top of this letter.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements