Employer-related scholarship procedures receive advance approval

Plain-English summary

A private foundation proposed scholarships for children of lower-paid employees who had worked for a company for at least two years. An independent committee would select 20 to 30 recipients annually using academic achievement, financial need, citizenship, leadership, community service, essays, activities, and recommendations. Awards would not require a particular field of study, future employment, or continued parental employment, and the foundation would monitor academic progress and misuse. The IRS approved the procedures under section 4945(g)(1), conditioned on compliance with Revenue Procedure 76-47's independence, program-design, and percentage tests. Grants made under the approved procedures would not be taxable expenditures, and recipients could exclude qualified tuition and related expenses subject to section 117(b).

Ruling snapshot

• Question: Do the foundation's employer-related scholarship procedures qualify for advance approval under section 4945(g)?
• Outcome: approved, subject to continued compliance with Revenue Procedure 76-47
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)(1); Rev. Procs. 76-47 and 85-51

Full text (IRS public release)

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

Release Number: 201702045
Release Date: 1/13/2017 Employer Identification Number:
Date: October 21, 2016

Contact person - ID number:

Contact telephone number:

LEGEND: UIL:

R = scholarship 4945.04-04
S = company

v dollars = salary

W = foundation

X = individual

Y = individual

z = number

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 R to support the pursuit
of undergraduate degrees by children of employees of S.

Each year your selection committee will award between 20 and 30 scholarships,
depending on the availability of funds. All scholarships will be for the same amount,
established from year to year based on the availability of funds. R is publicized via
notifications and materials that are distributed and made available to all S employees.

Letter 4793 (10-2012)
Catalog Number 58264E

To be eligible to receive a scholarship, an applicant must be the child, step-child, or
adopted child of a qualified employee of S. An individual is a “qualified employee” of S if
S has employed them for at least two years and their annual income from S does not
exceed v dollars. Applicants must be full-time students with a minimum cumulative grade
point average of 3.0.

Applicants must demonstrate, in an age appropriate manner, qualities of good
citizenship, leadership, and community service. Applicants also must provide a short
personal essay. Other factors that considered by the committee include the applicant's
prior academic honors; financial need; extracurricular activities; and written
recommendations from teachers, administrators, and/or community leaders. Selections
made are based on demonstrated past academic achievement and the promise of future
academic success.

Your committee will weigh all of the information and data submitted by each applicant.
You evaluate and select applicants based on the quality of their responses to, and/or the
satisfaction of, the eligibility criteria stated above. All committee determinations of
scholarship recipients are recorded in writing. There is no requirement that scholarship
recipients pursue any particular areas of study, nor is there any requirement or
expectation that scholarship recipients commit to work for, or render services to or for the
benefit of, S.

The terms and conditions of the scholarship will be contained in a grant letter sent to
each recipient. The recipient will be required to communicate his or her acceptance of the
scholarship, as well as agreement to the attendant terms and conditions, by way of a
written acceptance letter to the committee. The terms and conditions of each scholarship
will include the amount of the award; the name of the school to be attended by the
scholarship recipient; the requirement to maintain a grade point average of at least 3.0;
and your right to revoke the scholarship at any time upon the occurrence of various
disciplinary measures vis-a-vis the recipient.

As part of the written acceptance of the scholarship, the recipient is required to
acknowledge that you may request school-issued information regarding a recipient's
academic progress (such as a transcript or progress report), and that the school shall be
authorized to disclose such information to you. If at any time, the committee deems it
appropriate to terminate a scholarship due to a violation of the grant terms, the committee
will issue a written notification to the scholarship recipient of its decision. The recipient
may request an in-person meeting with the committee to request reconsideration of the
revocation decision, and the response to such request shall be determined in the sole
discretion of your committee.

Additionally, if your committee determines that any portion of a scholarship award has
been misused, they retain the right to require the recipient to repay such misused funds.

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Your committee will receive and review grantee reports annually to monitor compliance
with the scholarship terms, investigate any possible diversion of funds from their intended
purposes and take all reasonable and appropriate steps to recover diverted funds. They
will ensure scholarship funds are used for their intended purposes, and withhold further
payments to recipients who are deemed likely to divert funds.

All scholarships shall be for one academic year. Individuals who have previously received
a scholarship may reapply for an additional scholarship for any year during which such
individuals maintain eligibility under the general eligibility criteria.

The committee is composed of individuals appointed by you and the W. You will appoint
one or two independent individuals to serve on the committee, and the W will likewise
appoint one or two independent individuals to serve on the committee. At all times, the
number of individuals appointed by you and W will be equal. An individual is deemed to
be “independent” if such individual has no present or past employment or business
relationship with S; no present or past role as a director, officer, or employee of you or W,
as the case may be; and no family relationship with the family of X or Y. In selecting
individuals to serve on the committee, each of the boards will give strong preference to
individuals knowledgeable about education.

Committee members appointed by you serve for a period of three years, unless removed
by your Board of Directors or no longer able or willing to serve. Likewise, committee
members appointed by W serve for a period of three years, unless removed by the Board
of Directors of W or no longer able or willing to serve. A committee member may serve an
unlimited number of consecutive three year terms.

The scholarship is designed to support the educational studies of promising youth who
are the children of “Qualified Employees” of S. As described above, “Qualified
Employees” are those individuals who have worked for S for at least two years and earn
no more than v dollars. There are currently close to Z Qualified Employees working for S.

The policies and procedures adopted to govern the scholarship are designed to ensure
that the scholarship functions exclusively in furtherance of charitable and educational
purposes. Employees of S are not entitled to receive other forms of compensation in lieu
of the scholarship, nor are employees guaranteed that their children will be selected to
receive a scholarship. There is no additional employment requirement imposed on any
employee whose child receives a scholarship, nor is there any employment requirement
imposed on the recipient himself or herself. Employment with S as a “Qualified
Employee” is used exclusively as a factor to determine initial eligibility, and the definition
of “Qualified Employee” is structured to ensure that highly-compensated employees of S
are not eligible.

In addition to providing scholarships to children of employees of S, the Foundations may
also elect to award scholarship to children of employees of other companies that are
partially owned by X and Y and their respective families. All of the policies and

Letter 4793 (10-2012)
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procedures set forth herein with regard to scholarship awarded to children of employees
of S will likewise be applied to all scholarship awarded by you.

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 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

Letter 4793 (10-2012)
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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
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.

Letter 4793 (10-2012)
Catalog Number 58264E

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

Letter 4793 (10-2012)
Catalog Number 58264E