Advance approval of an employer-related scholarship program for employees' children

Plain-English summary

A private foundation runs a scholarship program for the children and dependents of employees at three related companies and asked the IRS to pre-approve its selection procedures under Section 4945(g). Employer-related scholarship programs get special scrutiny because grants to employees' families could really be disguised compensation, which would make them taxable expenditures subject to the Section 4945 excise tax. To avoid that, the IRS uses the guidelines in Rev. Proc. 76-47, including a "25 percent" or "10 percent" cap on how many eligible children can receive awards, plus safeguards like an independent selection committee, objective criteria unrelated to employment, no use of the program to recruit or retain employees, and continued eligibility even if the parent leaves. The foundation represented that it meets one of those percentage tests and all the safeguards. The IRS approved the procedures under Section 4945(g)(1), so the grants won't be taxable expenditures, and the scholarships are tax-free to recipients used for qualified tuition and related expenses under Section 117. Approval lasts only while the foundation keeps meeting the Rev. Proc. 76-47 conditions.

Ruling snapshot

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

Number: 202043009
Release Date: 10/23/2020
Employer Identification Number:

Date: June 3, 2020
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

W = Scholarship Program
X= Company #1

Y = Company #2

Z= Company #3

c dollars = dollar amount
d dollars = dollar amount
e = percentage

f
g
h

Dear

You asked for advance approval of your employer-related scholarship grant procedures
under Internal Revenue Code (IRC) 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 IRC 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 IRC Section 117(b)).

Description of your request
Your letter indicates you will operate an employer-related scholarship program W.

Letter 4793 (10-2012)
Catalog Number 58264E

Your purpose is to small monetary scholarships to qualified children of employees of X, Y
and Z.

The purpose of the program is to support the education of the children and dependents of
employees of the organizations. The scholarship is applied to tuition, fees, books, supplies
and equipment required for course load at accredited two or four-year colleges, universities,
vocational or technical schools within the United States. The scholarship amounts will range
between c dollars and d dollars.

You stated your foundation will not be giving educational loans.

The program will be publicized on the organizations’ websites and will also be publicized to
all employees of the organizations through a philanthropy document provided by the
foundation. .

The Applicants must meet the following criteria to be eligible for a scholarship:

a. Be a high school senior or currently enrolled or planning to enroll at an
accredited two or four-year college, university, vocational or technical school
within the United States for the applicable academic year; and

b. Be the son, daughter, or legal dependent of a qualifying employee who has
completed at least two full years of service with one of the organizations.

You stated upon receipt of applications from individuals who are applying for a
scholarship for the first time, the application will first be reviewed to make sure that the
individual applying meets the eligibility criteria, then once determined, these applications
will be put into the pool of applicants. The combined pool of applicants will then be
submitted to the independent selection committee.

The independent selection committee will evaluate the applications and select the
recipients based on the following criteria:

a. Financial need.

b. Community involvement.

c. Academic achievements and records.
d. Recommendations.

The independent selection committee is solely responsible for evaluating the applications
and selecting the recipients. No personnel, benefactors, supporters, substantial
contributors, etc. of the organizations are involved in the selection process.

The number of eligible scholarship applicants each year will be limited to e percent of the
total number of full-time equivalent employees of the Organizations. The current number
of full-time equivalent employees of the Organizations is approximately f.

Letter 4793 (10-2012)
Catalog Number 58264E

The grant amount will be determined by and in the sole discretion of the Foundation's
Board of Directors. The scholarship amount shall not exceed d dollars per scholarship
recipient per year.

Upon receipt of an application from an individual who is applying for a scholarship in a
subsequent year, applications will automatically be placed into the pool of applicants
without prejudice and without review of eligibility criteria since the eligibility criteria was
reviewed and met in the initial year the applicant applied for the scholarship. The
applicant will have to satisfy the eligibility criteria of currently being enrolled in an eligible
educational institution within the United States to maintain eligibility.

Scholarships are paid directly to the student whereby the student will apply the funds
towards tuition, fees, books, supplies and equipment required for the students' course
load. The foundation will provide one accounting of distributed scholarships funds at g
days after initial disbursement. The foundation will maintain appropriate records and
case histories of all recipients of scholarship grants.

The criteria for the selection committee membership includes:
a. Interest in academic achievement.
b. Business experience.
c. Not a member of the organizations and over the age of h.
d. The method for replacing the committee members is the president of the
foundation will elect new members after each member's 3-year term has expired.

You stated you will provide scholarships to attend an educational institution to children or
dependents of employees of the organizations with regard to the 25% limitation or the
10% limitation described in revenue procedures 76-47. Instead, you will award
scholarships based on facts and circumstances that demonstrate that the scholarships
will not be considered compensation for past, present or future services or otherwise
provide a significant benefit to the organizations. In particular:

a. You will use an independent selection committee whose members are separate
from the organizations and their creators or owners to select scholarship
recipients.

b. You will not use the program to recruit employees.

c. You will not end a scholarship or remove a recipient from the application pool if the
employee leaves the organizations after the scholarship has been awarded.

d. You will make prior recipients automatically eligible without regard to any
employment status.

Letter 4793 (10-2012)
Catalog Number 58264E

e. The selection criteria used by the independent selection committee to select
scholarship recipients are based upon objective standards that are completely
unrelated to employment with the organizations.

f. You will not limit the scholarship recipients' course of study in any form that would
particularly benefit the organizations.

g. Nothing in the program, such as part-time employment, disqualifies a significant
number of persons who serve the organizations.

h. The number of employees whose children will be eligible to apply for scholarships
is sufficiently large and open-ended to constitute a charitable class.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(IRC 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 IRC 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 IRC Section 117(a).

The grant is to be used for study at an educational organization described in IRC
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
IRC 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 IRC 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

Letter 4793 (10-2012)
Catalog Number 58264E

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
P.O. Box 2508

Cincinnati, OH 45201

Letter 4793 (10-2012)
Catalog Number 58264E

• 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 IRC 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

cc:

Letter 4793 (10-2012)
Catalog Number 58264E