Modified employee-child scholarship program received approval

Plain-English summary

A private foundation modified an existing scholarship program for children of employees of a related corporation in the United States and a foreign country. An independent tax-exempt administrator and independent committee would select recipients using academic performance, recommendations, interviews, motivation, and character, without considering the parent's job or the employer's business. Awards were renewable for up to three additional years, survived a parent's termination of employment, and could not be used for recruitment or tied to future service. New awards were capped at 25 percent of eligible employee children who applied and were considered, and the foundation adopted direct-payment, reporting, diversion-recovery, recordkeeping, and foreign sanctions-screening controls. The IRS approved the procedures under section 4945(g)(1), so qualifying expenditures would not be taxable to the foundation and qualified tuition-related amounts could be excluded by recipients under section 117.

Ruling snapshot

• Question: Did the modified employer-related scholarship program satisfy the advance-approval requirements for grants to employees' children?
• Outcome: Approved, assuming the foundation conducts the program as proposed and continues to meet the applicable percentage test.
• Key authorities: IRC §§ 117, 170, and 4945(g)(1); Rev. Proc. 76-47; Rev. Proc. 85-51

Full text (IRS public release)

Transcriber's note: this document is a seven-page scan. Obvious OCR errors in bullet symbols, page artifacts, redacted blank spaces, and form layout were corrected by comparison with every page image. Original grammatical and typographical irregularities are preserved. The wording is otherwise verbatim.

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

Release Number: 201928018
Release Date: 7/12/2019 Employer Identification Number: [redacted]
Date: April 18, 2019

Contact person - ID number: [redacted]

Contact telephone number: [redacted]

LEGEND UIL: 4945.04-04

B = Corporation

C = Foundation

D = Scholarship Program
E = Corporation

F = Corporation

G = Country

H = Number

j dollars = Amount

Dear [redacted]:

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 student.

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 from
foundation 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

Your letter indicates that you will operate an employer-related scholarship program called
D. You already had an approved scholarship program in place, and now you are
modifying it.

The purpose of D is to provide scholarship grants to a limited number of children of the
employees of B. The annual scholarship is j dollars per year and is renewable for up to a
maximum of three additional years, based upon evidence of satisfactory academic
progress.

The grants are for authorized college expenses which are defined as tuition, academic
fees, books, and room and board. The grants will be paid directly to the educational
organization in the United States or G. Any college or university must be the type of
educational organization described in Section 170(b)(1)(A)(ii) of the Code.

The scholarship program’s administrator currently is C. You may, from time to time,
select a new scholarship administrator to replace C. Any new scholarship program
administrator will be an organization exempt from federal income tax under Section
501(c)(3) of the Code and independent of you and B.

Information about D is available on B’s website, from C, and from guidance counselors at
many high schools in the United States and G within the communities in which B’s
facilities are located. Additionally, employees will be informed of the availability of the
scholarship grants through an employee newsletter.

In order to be eligible to be selected for a scholarship, a candidate must be the son or
daughter of an eligible employee (including a stepchild, an adoptive child or a child who
does not reside with an eligible employee but is a dependent of an eligible employee for
federal income tax purposes.) Except as discussed below an eligible employee is any
person employed by B (or a wholly-owned subsidiary) in the United States or G on a full-
time basis with a least one year of continuous service; provided, however, the death of an
eligible employee during the year(s) of the candidate’s eligibility to apply for a scholarship
will not render the candidate ineligible.

For purposes of an initial scholarship award, eligible employees do not include those
employees of B with the title of Vice President or above. Eligible employees also do not
include those who serve as your trustees or officers.

A candidate must be in his or her final year of high school, graduate in the current
academic year, and enter an accredited United States state or non-profit college or
university or educational organization in G not later than the next academic year.
Exceptions to the requirement that a scholarship recipient enter an accredited college or
university in United States or G not later than the next academic year may be granted, at
the sole discretion of the scholarship program’s administrator, currently C, for extreme
circumstances, such as a significant health or family emergency. Such exceptions shall
be granted for up to one year and only with the written approval of the C. The exception
is available whether or not the scholarship recipient's parent remains employed with B. C
may not consider the position of the student’s parent with B in determining whether to
grant the exception.

Students entering a United States Military Academy, participating in an R.O.T.C.
Scholarship Program, or receiving a full scholarship from another source in the United
States or G are not eligible to compete for this scholarship.

Certain college freshmen attending an accredited state or private non-profit college or
university in the United States or G may have been ineligible during their final year of
high school solely due to the inability of the parent to satisfy the length of service criteria
to qualify as an eligible employee. Should the parent meet the length of service criteria
during the candidate’s freshman year, the candidate may apply for the scholarship for the
next academic year, whether or not the candidate applied for a scholarship in the prior
year. In such a case, all other selection criteria and eligibility requirements must be met.
In the event such a candidate is selected for a scholarship, such scholarship will be
renewable for a maximum of three additional school years, based on satisfactory
academic progress as determined by C.

The scholarship contains no restriction regarding any candidate’s or recipient’s race,
position, other than the exclusion of certain executives from the definition of eligible
employees, services or duties of a candidate’s or a recipient's parent. In addition, the
scholarship will not be used to recruit new employees or as an inducement to present
employees to continue their employment or otherwise follow a course of action
sought by B.

A scholarship grant will not be terminated because the recipient’s parent terminates
employment with B subsequent to the awarding of the scholarship, regardless of the
reason for such termination. Further, if a scholarship is awarded for one academic year,
no recipient will be ineligible for a scholarship in any subsequent year (limited by the
general restriction on the total number of awards a student may receive) because that
individual’s parent is no longer employed with B. Once an individual has received a
scholarship grant, no other employment criteria will be imposed upon such person’s
parent in order for the renewal of that recipient’s scholarship grant. Finally, at the time the
scholarship is awarded, there will be no requirement, condition or suggestion, express or
implied, that the recipient or the recipient’s parent is expected to render future
employment services to B or you or be available for such future employment.

The scholarship grants are available for any course of study at an accredited college or
university in United States and G and are in no way limited to those that would be of
particular benefit to B or you. There is no commitment, understanding, or obligation
suggesting that the course of studies be undertaken to benefit you or B.

Eligibility for renewal is determined by C, based solely on satisfactory academic progress
of the recipient as a full-time student and submission of an annual student statement.
Likewise, a recipient who was first awarded a scholarship as a college freshman,
qualifies for renewal for a maximum of three years, provided he or she is otherwise
eligible. Scholarships may be renewed even if the recipient has successfully completed
the requirements for a bachelor’s degree in less than four years, provided he or she has
enrolled in a full-time second or advanced-degree program at an eligible university or
college within 12 calendar months of successful completion of the undergraduate degree.

The selection of grant recipients will be made by a committee chosen by C and will be
composed of individuals who are totally independent of B and you. No committee

member will be a current or former employee of either E, F, B or you. C will choose
committee members based on their background and/or knowledge in the field of
education. No spouse, child or grandchild (or stepchildren or step-grandchildren) of

your committee member, trustee or an officer may be considered for a scholarship grant.
C is an independent non-profit corporation exempt from federal income tax under Section
501(c)(3) of the Code.

In its sole discretion, C may waive, in writing, the requirement that a recipient be enrolled
on a full-time basis and permit the recipient to be enrolled on a part-time basis at an
eligible university or college. This one-time waiver is only available to a recipient in his or
her final semester of study who is expected to graduate at the end of that semester. The
waiver is available whether or not the recipient's parent remains employed with B. C may
not consider the position of the recipient’s parent with B in determining whether to grant
the waiver.

You estimate that the potential number of applicants is substantial as B employs
approximately H individuals in the United States and G who will qualify as eligible
employees. The number of scholarship grants awarded in any year (not including
renewals of scholarship grants awarded in previous years) will not exceed 25 percent of
the number of eligible employee's children who: (i) were eligible; (ii) were applicants for a
scholarship; and (iii) were considered by the selection committee in selecting recipients of
grants in that year.

The committee will screen candidates based on test scores (the SAT and ACT), class
rank, recommendations from school personnel, as well as conclusions drawn by the
committee from personal interviews as to a candidate’s motivation and character. No
consideration will be given to the employment of candidate’s parents or to B’s line of
business, nor will B or you provide any instruction to C as to how scholarship recipients
should be selected.

Grants will be awarded solely in the order recommended by the selection committee and
cannot be increased from the number recommended by the selection committee. Further,
only the committee may vary the amounts of the grants awarded. The announcement of

the awards will be made by C and B. You may also verify the eligibility of each candidate.

The general supervision of the scholarship grants will be undertaken by C. Scholarship
grants will be paid to the educational organization with the understanding that the funds
will be used to defray tuition, academic fees, books, and room and board only so long as
such recipient is enrolled in the school and his or her standing is consistent with the
purposes and conditions of the grant.

You will comply with the Office of Foreign Assets Control (“OFAC”) procedures by
verifying that any foreign recipient of any scholarship grant, the employee-parent, and
foreign educational institution to be attended are not on OFAC’s list of Specially
Designated Nationals and Blocked Persons.

You represent that you will (1) arrange to receive and review grantee reports annually
and upon completion of the purpose for which the grant was awarded, (2) investigate
diversions of funds from their intended purposes, and (3) take all reasonable and
appropriate steps to recover diverted funds, ensure other grant funds held by a grantee
are used for their intended purposes, and withhold further payments to grantees until you

obtain grantees’ assurances that future diversions will not occur and that grantees will
take extraordinary precautions to prevent future diversions from occurring.

You represent that you will maintain all records related to the following: (1) individual
grants including information to evaluate grantees, (2) grantees which are identified as a
disqualified person, (3) how the amount and purpose of each grant was established, and
(4) how you established supervision and investigation of the grants.

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.

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 u
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.

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