Community and employee-child scholarships approved

Plain-English summary

A private foundation proposed one-year regional scholarships and a limited number of scholarships for dependent children of a company's full-time employees. Applicants would be evaluated on academic record, leadership, activities, honors, work experience, and goals, and awards could support tuition, required fees, books, equipment, and room and board. The employee-child awards would be selected by an independent committee, would not depend on continued parental employment, and could not be used for recruiting or retaining workers. The foundation represented that the employer-related program would satisfy Revenue Procedure 76-47's seven safeguards and the applicable 25 percent or 10 percent award limits. The IRS approved both the general and employer-related scholarship procedures under Section 4945(g)(1).

Ruling snapshot

• Question: Did the foundation's community and employer-related scholarship procedures satisfy the advance-approval requirements?
• Outcome: Approved.
• Key authorities: IRC §§ 117(a), 170(b)(1)(A)(ii), and 4945(g)(1); Rev. Procs. 76-47 and 85-51

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

P.O. Box 2508
Cincinnati, OH 45201

Number: 202117020
Release Date: 4/30/2021
Employer Identification Number:

Date: February 2, 2021
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

Q= Region
R= County
S= County
T= County
U= County
V= County
W= Company

Dear

You asked for advance approval of your scholarship grant procedures under Internal
Revenue Code Section 4945(g) and 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 scholarships and your 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
scholarships and 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 a scholarship program and an employer-related

scholarship program.

Your general purpose is to provide funding to other charitable organizations. At your
annual or more frequent meetings, you may select recipients from among various
qualified institutions which are organized under IRC Section 501(c)(3) that operate to
benefit the community at large. In so giving this financial aid, it is your intent and purpose
to regularly participate with recipients and benefit the public at large.

The purpose of your scholarship programs is to award scholarships to individuals,
consistent with your purpose and is intended to strengthen the communities in Q,
including the counties of R, S, T, U and V. In addition, you will award a limited number of
scholarships for the benefit of eligible and qualified children of employees of W
(“Employee Scholarships’).

You will determine the value of each scholarship each year based on the amount of funds
available and the other charitable programs you will be supporting for the year, using the
minimum distribution requirement rules of the Code as a guideline. Your scholarship
programs will be structured to provide one-year educational scholarship awards.
Scholarships can only be used for: (1) tuition and fees required for the enrollment or
attendance of the student at a qualifying institution; (2) fees, books, supplies and
equipment required for courses of instruction at such educational institution; and (3) room
and board. At or close to the end of each academic year, if the recipient needs continued
scholarship support to complete the degree program as planned, a new application will
be required.

Scholarships will be awarded on an objective and nondiscriminatory basis. Specifically,
you will not discriminate on the basis of race, color, national origin, ethnic origin, religion,
creed, sexual orientation, gender, or disability.

All applicants must complete your application form and submit transcripts and other
records of academic achievements and honors (including test scores, resumés and
recommendations).

Applicants to your scholarship programs must be:

• High school seniors/students in their final year of upper-secondary school or
graduates or current postsecondary undergraduates.

• Planning to enroll in full-time undergraduate study at an accredited two- or four-
year college, university or vocational-technical school (or equivalent) for the entire
upcoming academic year.

In addition, applicants for Employee Scholarships must be dependent children, age 26
and under, of regular full-time W employees as of the application deadline date.
Dependent children are defined as natural and legally adopted children or stepchildren
living in the employee’s household or primarily supported by the employee. You will
require sufficient information in your application to determine whether applicants are the
dependent children of regular full-time W employees in order to ensure that Employee

Scholarships are awarded in compliance with the additional requirements and restrictions
for Employee Scholarships.

Scholarship recipients will be selected on the basis of academic record, demonstrated
leadership and involvement in school and community activities, academic and other
honors, work experience, and statement of goals and aspirations.

Scholarships will only be awarded to recipients who attend an accredited two- or four-
year college, university or vocational-technical school that qualifies under Section

170(b)(1)(A)(ii) of the Code.

Your Board of Directors will review all applications, except applications for Employee
Scholarships. All applications for Employee Scholarships will be reviewed by a selection
committee composed of not less than three individuals appointed by your Board of
Directors which will determine the Employee Scholarship recipients. No member of the
selection committee shall be a director, officer, employee (current or former) or owner of

W or you or the organizer of you.

The following individuals will not be eligible to receive scholarships from you: any child or
relative of an owner, director, or officer of you or W, or of a selection committee member.
Furthermore, your directors and selection committee members will be obligated to
disclose any personal knowledge of and relationships with any potential recipient under
consideration and to refrain from participation in the award process in a circumstance
where he or she would derive, directly or indirectly, a private benefit if any potential
recipients are selected over others.

You will (1) arrange to receive and review reports from each scholarship recipient no less
than quarterly to ensure compliance with the purpose of the scholarship, (2) make tuition
payments or payments for housing directly to the institution when possible, (3) distribute
and ensure scholarship funds held by the recipient are used for their intended purposes,
(4) investigate any perceived diversions of funds from their intended purposes and
ensure such actions do not occur in the future, and (5) take reasonable steps to recover
scholarship funds in the event such funds are not used for their intended purposes.

You will maintain all records related to the following: (1) the number of applicants,
including the number of applicants for Employee Scholarships, (2) individual scholarships
including information to evaluate recipients, (3) how the amount and purpose of each
scholarship was established, and (4) how you established supervision and investigation
of the scholarships described above.

Your employer-related scholarship program will satisfy the seven conditions for approval
of employer-related scholarship programs and the percentage tests under Revenue
Procedure 76-47 with respect to the selection and award of Employee Scholarships, as

follows:

1. You will publicize the program by an announcement to all employees of W and
   one or more press releases. You will make announcements of the awards, and in
   all cases, you will be clearly identified as the grantor of Employee Scholarships.
   Neither you nor W will use the program to recruit or retain employees.

2. As described above, selection of Employee Scholarship recipients will be made by
   a selection committee consisting wholly of individuals totally independent (except
   for participation on this committee) and separate from you, your organizer, and W.
   Employee Scholarships will be awarded solely in the order recommended by the
   selection committee. The number of Employee Scholarships to be awarded may
   be reduced but may not be increased from the number recommended by the
   selection committee. Only the committee may vary the amounts of the Employee
   Scholarships awarded.

3. Employee Scholarship recipients must be children of employees who meet the
   minimum standards for admission to an educational institution for which the
   scholarships are available. No persons will be considered eligible if they would not
   reasonably be expected to attend such an institution, however, even if they meet
   such minimum standards. There shall be no minimum period of employment
   required.

4. As described above, selection of scholarship recipients shall be based solely upon
   substantial objective standards that are completely unrelated to the employment of
   the recipients or their parents and to W’s line of business. The following standards
   will be used: prior academic performance, performance on tests designed to
   measure ability and aptitude for higher education, recommendations from
   instructors or other individuals not related to the potential recipients, and
   conclusions drawn from personal interviews as to motivation and character.

5. You shall not terminate any Employee Scholarship awarded because the
   recipient’s parent terminates employment with W subsequent to the awarding of
   the scholarship regardless of the reason for such termination of employment.
   Recipients of Employee Scholarships who must reapply for a scholarship to
   continue studies for a subsequent year may not be considered ineligible for a
   further scholarship simply because that individual or the individual’s parent is no
   longer employed by W. Instead, any standards for renewal will be based solely
   upon non-employment related factors such as maintenance of scholastic
   standards. Renewal may not be denied because the recipient or parent has
   previously terminated employment with W. At the time the scholarship is awarded
   or renewed, there will be no requirement, condition or suggestion, express or
   implied, that the recipient or parent is expected to render future employment
   services for you or W, or be available for such future employment, even though
   such future employment is at the discretion of you or W. Neither you nor W will use
   the scholarship program to recruit or retain employees.

6. The courses of study for which scholarships are available and awarded will not be
   limited to those that would be of particular benefit to W or to you.

7. The terms of the scholarships and the courses of study for which scholarships will
   be available will meet all other requirements of Section 117 of the Code and the
   regulations thereunder, and will be consistent with a disinterested purpose of
   enabling the recipients to obtain an education in their individual capacities solely
   for their personal benefit and will not include any commitments, understandings, or
   obligations, conditional or unconditional, suggesting that the studies are
   undertaken by the recipients for the benefit of W or you or have as their objective
   the accomplishment of any purpose of W or you other than enabling the recipients
   to obtain an education in their individual capacities and solely for their personal

benefit.

Your employer-related scholarship program will meet the requirements of either the 25
percent or 10 percent test in Revenue Procedure 76-47 for Employee Scholarships.

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.

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