IRS approves an employer-related scholarship program

Plain-English summary

A private foundation proposed scholarships for children, dependents, and grandchildren of employees of a company and its subsidiaries. An independent committee would select recipients using academic achievement, aptitude, recommendations, activities, and financial need, with no employment-based criteria. Awards would not be used to recruit or retain employees, would be paid directly to schools, and would remain subject to reporting, oversight, and the percentage limits for employer-related scholarships. The IRS approved the procedures under IRC § 4945(g)(1), so properly administered awards will not be taxable expenditures and may qualify as tax-free scholarships when used for eligible expenses. The approval continues only while the program follows Revenue Procedure 76-47 and the applicable percentage test.

Ruling snapshot

• Question: Do the foundation's employer-related scholarship procedures satisfy § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g); 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: 202103019
Release Date: 1/22/2021
Employer Identification Number:

Date: October 27, 2020
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04
B = Company

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
Your letter indicates you will operate an employer-related scholarship program. Your
scholarship program will be available to children, dependents, and grandchildren of

employees of B and its subsidiaries.

Neither you nor B will use the scholarship program to recruit employees or to induce
employees to continue their employment, or otherwise to follow any other course of
action sought by B. For example, the scholarship program will not be conditioned on
continued employment at B and an awarded scholarship will not be forfeited if
employment of a recipient’s parent, guardian, or grandparent is terminated by B. In
addition, beyond notifying existing employees of the existence of the program, B will not
use the scholarship program to induce prospective employees to join B or current

employees to continue employment there. You will publicize the scholarship program
through memoranda to B employees.

The scholarship program will impose identifiable minimum requirements for grant
eligibility. For example, an individual will qualify as an eligible grantee if the following
requirements are satisfied and verification of same is submitted to the selection
committee, which will retain such documentary evidence:
• The student is a member of the charitable class.
• The student must be enrolled for a minimum of 12 credit hours each semester.
• The student is pursuing a post-secondary education at an accredited two-year or
four-year technical school, college, university or graduate school.
• The student satisfies the minimum admissions standards of such technical school,
college, university, or graduate school.

Eligibility will not be related to employment-related criteria, such as the employee’s
continued employment with B, position, services, or duties.

The members of your selection committee will be independent of you and will not include
any employees (current or former) of B or affiliates. You may retain the services of an
independent service provider that is in the business of performing scholarship
administration services to private foundations, including scholarship selection
committees.

Your Board will determine the maximum scholarship award. However, the independent
committee will determine the amount of each scholarship grant. Consideration may be
given for the amount of the tuition at the designated school or college. Scholarships will
be given for one academic year. Scholarships will be awarded in the order recommended
by the committee. Either you or the committee will publicly announce the awards.

Selection of scholarship recipients will be based solely on objective standards that are
completely unrelated to the recipients’ (or their parents’) employment to B or its line of
business. You will use the following objective criteria to select recipients: Prior academic
performance and achievement; performance on tests designed to measure ability and
aptitude for higher education (such as the ACT and SAT); recommendations from
instructors or other individuals unrelated to the candidate; involvement in community
activities, artistic activities, athletics, work experience, and other extra-curricular activities;
and financial need.

Once a scholarship is awarded, it may not be terminated because the recipient (or his or
her parent) terminates employment at B. Courses of study for which scholarships are
available will not be limited to those that would be of particular benefit to you or B. As
discussed above, scholarships will be available to students pursuing post-secondary
education at any accredited two-year or four-year technical school, college, university or
graduate school, regardless of the course of study.

Scholarship checks will be made payable in one or two payment(s) and mailed directly to
the school or college. The award will be applied to the student’s fall and/or spring

semester tuition, fees, books, and room and board. You will require recipients to provide
grade transcripts following each semester, quarter or term to verify each recipient is still
in good standing with the school or college and satisfies the on-going eligibility
requirements discussed immediately above. Unused funds will be returned to you.

The terms of the grant and the courses of study will meet all other requirements of
Section 117 and will be consistent with the disinterested purpose of enabling the
grantees to obtain an education solely for their personal benefit. The scholarships will be
awarded on an objective and non-discriminatory basis, with neither race, creed, color,
sex, age, nor disability being considered.

You will award scholarships to no more than 25 percent of the eligible applicants
considered by the selection committee each year. You will verify annually that the
number of individuals awarded scholarships will not exceed 25 percent of the number of
individuals who were eligible for the scholarship program, applied for such scholarships,
and were considered by the program’s selection committee in selecting the scholarship
recipients for that year or 10 percent of the number of individuals who were eligible for
such scholarships, whether or not they applied in that year.

To maintain an award, the individual must continue to satisfy the following requirements:
• The student continues to attend an accredited two-year or four-year technical
school, college, university, or graduate school.
• The student continues to satisfy the minimum admissions standards of such
technical school, college, university, or graduate school.

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 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
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
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