Employer-related scholarship procedures approved under § 4945(g)(1)

Plain-English summary

A private foundation asked the IRS to approve in advance the way it runs an
employer-related scholarship program, which awards college scholarships to the
dependent children of employees at several affiliated companies. Under Internal
Revenue Code § 4945, a private foundation's grants to individuals for study are
normally taxable expenditures (triggering an excise tax) unless the IRS
pre-approves the award procedures. Employer-tied scholarships get extra
scrutiny under Revenue Procedure 76-47 to make sure they are true scholarships
and not a disguised employee benefit: an independent selection committee must
pick winners on neutral criteria, the number of awards must stay within
percentage caps (no more than 25% or 10% of eligible dependents, depending on
the test used), and the scholarships cannot be used to recruit or retain
employees. The IRS found the foundation's procedures meet § 4945(g)(1) and Rev.
Proc. 76-47, so the grants won't be taxable expenditures and, under § 117(a),
won't be taxable income to students who use them for qualified tuition and
related expenses. Approval lasts as long as the foundation keeps following
those procedures.

Ruling snapshot

• Question: Do the foundation's employer-related scholarship procedures
  qualify for advance approval under § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC § 4945(g)(1); Rev. Proc. 76-47; Rev. Proc. 85-51;
  IRC §§ 117(a), 170(b)(1)(A)(ii)

Full text (IRS public release)

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

Release Number: 201908025
Release Date: 2/22/2019 Employer Identification Number:

Date: November 28, 2018
Contact person - ID number:

Contact telephone number:

LEGEND: UIL:

B = company 1 4945.04-04
C = company 2

D = company 3

E = company 4

f = number

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 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 to provide educational
scholarships to the dependents of employees of B, C or D by selecting qualified
individuals to receive grants to advance their education. Your program will be operated in
part with a third-party administrator, E.

Scholarships will be promoted among the eligible group of dependents through
communications in the communities where eligible B, C or D employees are located.

Letter 4793 (10-2012)
Catalog Number 58264E

To be eligible for scholarship consideration, an applicant must:

a. Be a dependent of an active, full-time B, C or D employee who has been with them
for a minimum one-year employment as of the application deadline. Dependents
for this purpose include any individual in any of the following three groups: (i)
individuals who are enrolled in a medical plan of B, C or D as a dependent of an
employee; (ii) individuals claimed as a dependent on an employee's federal tax
return; and (iii) descendants (biological, adopted or by marriage) of an employee
who are part of an employee’s household for federal tax purposes.

b. Be a high school graduate or current postsecondary undergraduate age 26 or
under; excluding spouses and life partners of employees.

c. Have a cumulative grade-point average of 3.0 or higher at the time of applying.

d. Plan to be enrolled in full-time undergraduate study at an accredited two- or four-
year college (excluding proprietary and online-only school) or vocational-technical
school for the entire upcoming academic year.

Substantial contributors, foundation managers, officers, directors, and B, C or D
managers, officers and directors, as well as their family members, will be ineligible to
participate in the program.

E, as the third-party administrator, will develop and collect applications, manage the
selection committee, select recipients and awards scholarships. The selection committee
consists wholly of individuals totally independent and separate from B, C or D. When
reviewing applications, the selection committee will consider the following criteria:

Unusual personal or family circumstances

Financial need

Statement of career and educational aspirations and goals
Leadership and participation in school and community activities
Work experience

Academic achievement

Applicants will provide evidence of financial need, academic transcripts, and any other
documentation the selection committee may request. Personal interviews may be
conducted. A rubric may be used to weigh each of the criterion above to select
recipients. Favorable recipients would have a strong application that shows unusual
circumstances and financial need, demonstrated goals and aspirations, community
participation and leadership, work experience, and academic achievement. A lottery
system will not be used.

Letter 4793 (10-2012)
Catalog Number 58264E

In accordance with Revenue Procedure 76-47, section 4.08, the total number of
scholarships awarded will not exceed either (i) 25% of the number of employee
dependents who were eligible, applied for such grants, and were considered by the
selection committee, or (ii) 10% of the number of employee dependents who can be
shown to be eligible for grants (whether or not they submitted an application) in that year.

The number and amount of individual grants that may be awarded will depend on the
philanthropic priorities of your board and available funds. In any event, the number of
awards shall not exceed either (1) | % of the number of B, C or D employee dependents
who (i) were eligible, (ii) applied for such grants, and (iii) were considered by the selection
committee, or (2) % of the number of B, C or D employee dependents who can be
shown to be eligible for grants (whether or not they submitted an application) in that year.

For purposes of calculating % of the eligible employee dependents, eligibility will be
based on the number of individuals who are enrolled in a medical plan of B, C or D as a
dependent of an employee and meet the eligibility criteria. The eligibility criteria will
ensure the pool of eligible employee dependents meet the minimum standards for
admission to an educational institution, and can be reasonably expected to attend such
an institution, in compliance with Revenue Procedure 85-51. B, C and D will maintain
records of the number of employee dependents meeting this criterion.

Currently, f awards, of up to g dollars each, are awarded annually. You provide the funds
to E for awarding scholarships.

E will be required to operate in compliance with Revenue Procedure 76-47, and related
rulings, including supervision requirements. As such, any apparent misuse of funds will
be promptly investigated. If funds have, in fact, been misused, the recipient will be
required to immediately return the funds, and no further distributions will be made for that
recipient.

Scholarships are not renewable. Any prior recipient that continues to be eligible may
apply again. Per Revenue Procedure 76-47, in the case of applicants who received prior
awards, the employment requirement will be waived.

Per Revenue Procedure 76-47, you attest that scholarships will not be used by B, C or D,
to recruit employees or to induce employees to continue employment or otherwise follow
a course of action sought by B, C or D. No recipient or parent is expected to render
future services for B, C or D, or to be available for such future employment.

B, C or D will not limit in any way the courses of study for which scholarships are
available, and does not otherwise encourage students to choose courses of study that of
any benefit to B, C or D.

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).

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
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
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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4793 (10-2012)
Catalog Number 58264E