Employer-related scholarships for employees' children approved

Plain-English summary

A private foundation proposed renewable scholarships for dependent children of full-time employees of a beer distributor. Eligible students had to meet age and parental-service requirements, pursue full-time post-secondary study, and could not be dependents of employees at vice president level or above. An unrelated organization would use trained employees and an algorithm to rank applications based on academics, leadership, activities, work experience, goals, and unusual circumstances, without considering financial need. Awards would continue despite the parent's later termination of employment, and the foundation committed to annual reports, monitoring, recovery, and recordkeeping. The IRS approved the program under section 4945(g)(1) and Revenue Procedure 76-47, conditioned on continued compliance with the employer-related scholarship rules and percentage tests.

Ruling snapshot

• Question: Do the foundation's employer-related scholarship procedures for employees' children satisfy the advance-approval requirements?
• Outcome: approved, subject to Revenue Procedure 76-47 and its applicable percentage tests
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B), and 4945(g)(1); Rev. Procs. 76-47 and 85-51

Full text (IRS public release)

Transcriber's note: this document is a scan. Obvious OCR errors in the legend, bullet symbols, headings, spacing, and punctuation were corrected by comparison with all five page images. Redacted identifying fields and legend values are marked [redacted]. Unusual wording and a double colon appearing in the scan are preserved. The wording is otherwise preserved verbatim.

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

Release Number: 202004018
Release Date: 1/24/2020 Employer Identification Number: [redacted]
Date: October 28, 2019

Contact person - ID number: [redacted]

Contact telephone number: [redacted]

LEGEND UIL: 4945.04-04

B= Beer Distributor

C= Unrelated Organization
X= [redacted]

Y= [redacted]

z= [redacted]

d= [redacted]

e dollars = $[redacted]

f= [redacted]

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 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
Your letter indicates you will operate an employer-related scholarship program for
dependent children of full-time employees of B.

Your purpose is to provide financial assistance to an individual whose purpose is to.
further their individual education.

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To be eligible to apply for a scholarship, the student must:

• Be dependent children, age X and under, of full-time B employees, who have a
minimum of Y employment with the company as of the application deadline.

• Be high school seniors, high school graduates or current postsecondary students.

• Plan to enroll in full-time study at an accredited two-year, four-year, or graduated
studies college, university, or vocational-technical school, for entire academic
year.

• Not be dependents of vice president or above grade level employees.

You will communicate your scholarship program through internal company
announcements.

The selection criteria include:

• Academic performance

• Demonstrate leadership

• School and community activities

• Work experience

• Statement of career and educational goals

• Unusual personal or family circumstance

Financial need will not be considered in determining eligibility.

You will determine the number of grants to be made annually. Initially, you intend to
award z scholarships per year which can be renewed for an additional d years. All
recipients will receive a scholarship for the same amount on the same terms. You
anticipate, scholarship recipients would receive e per year for a maximum of f years.

The recipient must show proof of enrollment in an accredited college or vocational school
before the scholarship amount is paid. To be eligible for renewal of the scholarship a
recipient must submit a yearly report showing academic progress towards a degree to
you. The recipient must also show proof of enrollment for the next academic year. You
will not renew a scholarship if you have information that the original scholarship was used
for any other purposes than appropriate educational expenses, the recipient has engaged
in any misconduct or the recipient fails to maintain a satisfactory academic record.

Once awarded, a scholarship may not be terminated, and renewals may not be denied
because the recipient’s parent terminates employment, regardless of the reason for
termination.

You have engaged C to be third party selection committee. C uses a team approach for
selection. The team reviews applications and participates in selecting recipients for
scholarships. C ensures equity and consistency in evaluation procedures by conducting
all evaluation and selection processes in house by its employees. All members of the

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selection committee complete an extensive training program with in depth instruction on
decision making and quality assurance procedures. The selection committee uses an
algorithm that evaluates and ranks student applications on an objective and
nondiscriminatory basis.

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’ assurance 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 grants described above.

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

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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
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

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5

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.

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

Enclosure

Letter 4793 (10-2012)
Catalog Number 58264E