IRS approves an employer-related scholarship program administered by an independent charity

Plain-English summary

A private foundation proposed funding an employer-related scholarship program through an independent public charity for dependent children of qualifying employees worldwide. The charity would verify eligibility, appoint an independent selection committee, select recipients using academic and personal criteria, and limit new awards under Revenue Procedure 76-47's percentage rules. Renewals would not depend on continued employment, and awards could support qualifying undergraduate study, with possible graduate-level expansion. The charity would monitor enrollment, grades, use of funds, diversions, records, and economic-sanctions restrictions. The IRS approved the procedures under Section 4945(g)(1).

Ruling snapshot

• Question: Did the employer-related scholarship procedures satisfy the advance-approval requirements for grants to individuals?
• Outcome: Approved.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1); 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: 202132010
Release Date: 8/13/2021
Employer Identification Number:

Contact person - ID number:
Date: May 18, 2021

Contact telephone number:

LEGEND

UIL: 4945.04-04

X = Name
Y = Name
Z = Name

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.

The purpose of your program is to provide scholarships for children of employees of X
(and its subsidiaries and affiliates) for study at a college, university or vocational school.
The scholarship grant must only be used to fund the cost of tuition and course-related
fees, books, supplies and equipment at the two-or four-year college, university or
vocational-technical school. All scholarships will be made on an objective and non-
discriminatory basis and without regard to race, religion, national origin or gender. No
scholarship grants will be made for a purpose that is inconsistent with your charitable and
educational purposes. You further indicated that you will not make individual grants
directly. Specifically, you will periodically make grants to the Scholarship Charity, which is

Letter 4793 (10-2012)
Catalog Number 58264E

exempt from tax under IRC Section 501(c)(3) and classified as a public charity under
Code 509(a).

To publicize the availability of the scholarships and solicit applications for the program,
you will utilize X interoffice communications and website. Additionally, you will be clearly
identified as the grantor of the scholarships.

To be eligible for an award, qualified individuals will consist of those individuals (i) who
are the dependent children, under the age of [redacted], of part-time (minimum 20 scheduled
hours per week) or full time employees of X worldwide who have a minimum of one year
employment with X as of the application deadline date, (ii) who are in their final year of
upper secondary school/high school or are current undergraduate students and (iii) who
plan to enroll in fulltime undergraduate study at an accredited two-or four-year college,
university (or equivalent) or vocational-technical school for the entire upcoming academic
year. Depending on the availability of funding, in the future you may provide scholarships
for graduate-level degree programs. You may also adjust the minimum employment
requirements, provided that in no case that the minimum employment period will exceed
three years.

No scholarships will be made (i) to your substantial contributors, (ii) to members of your
Board of Directors, (iii) to your officers, (iv) to any disqualified person with respect to you
within the meaning of Code Section 4946, (v) to any member of the selection committee,
(vi) to senior managers of X (as determined by you from time to time in accordance with
X's employee grade system), or (vii) to any family members of any of the persons listed in
clauses (i) through (vi) above.

You will determine the number and maximum amount of scholarships for each cycle
based on the availability of funds. In accordance with Revenue Procedure 76-47, 1976-2
C.B. 670, the Scholarship Charity will limit the number of grants to 25 percent of the
number of employees' children who, (i) were eligible, (ii) were applicants for such grants,
and (iii) were considered by the selection committee in selecting the recipients of grants
in that year. Available grants may be awarded on a worldwide basis or, provided there
are enough qualified applicants, to different geographical regions in proportion to the
number of applications received from each region.

Applicants will directly submit their applications detailing their academic backgrounds and
proposed plans of study to the Scholarship Charity. The Scholarship Charity will then
verify eligibility of applicants and will ask you to confirm relevant employment information.
All eligible applications will then be reviewed by an independent selection committee
whose members will be appointed by the Scholarship Charity. The Scholarship Charity is
also responsible for replacing selection committee members. and will determine the
criteria for committee membership and the method of replacing committee members.
Further, the Scholarship Charity will ensure members will be independent of both you and
X and will not include any individual who would derive a private benefit, directly or
indirectly, if certain potential scholarship grant recipients are selected over others.

Letter 4793 (10-2012)
Catalog Number 58264E

To select the recipients, the selection committee may consider academic performance,
demonstrated leadership and participation in school and community activities, work
experience, a statement of career and educational goals and objectives, unusual
personal or family circumstances, an outside appraisal, and/or an essay The selection
committee in the future may also consider financial need and other sources of support for
an applicant. The selection committee will make recommendations to the Scholarship
Charity who will then make final determinations as to the grant recipients as well as
• Inform all applicants of their decision regarding their application. The Scholarship Charity
will also require each individual who is awarded a scholarship to acknowledge and agree
to abide by the terms of the scholarship grants, including all restrictions on the use of the
scholarship funds, before the funds are disbursed.

All scholarship grants will have a [redacted]-year term. A recipient may reapply to the program
for the following year if the recipient has complied with the terms of the prior grant and is
otherwise eligible in accordance with the initial qualifying criteria, provided however, that
an otherwise eligible renewal applicant will not be considered ineligible for subsequent
grants to complete the degree program for which funding was initially awarded on the
basis that his or her family member is no longer employed by X. Renewal of grants
awarded in prior years will not be considered in applying the 25% limitation on new
awards.

Concerning payment of funds, for recipients in the countries of Y and Z, the Scholarship
Charity will pay funds directly to the applicable educational institution and will direct the
educational institution to apply the funds to only the qualifying expenses of the recipient
while payment of scholarship grants in other countries will be paid directly to the
individual recipient upon verification of enrollment.

The Scholarship Charity will specifically:

• Inform all applicants of their decision regarding their application.

• Direct the educational institution to apply the funds only to qualifying expenses of
the individual recipient where the funds are paid to an educational institution.

• Obtain reports of courses taken and grades received by each scholarship
recipient. Such reports must be verified by the educational institution attended by
the grantee and must be provided by each recipient upon completion of the
period for which the scholarship was provided and, in any event, no less
frequently than annually

• Review required reports from recipients and will take reasonable steps to
investigate any potential misuse of the scholarship grant funds.

If the reports submitted by recipients or other information (including a failure to submit
reports) indicates that scholarship grant funds may not have been used in accordance
with the terms of the scholarship, the Scholarship Charity will initiate an investigation and
will withhold any further payments until it has determined that no part of the scholarship
grant has been used for improper purposes and any delinquent reports have been
submitted.

Letter 4793 (10-2012)
Catalog Number 58264E

If the Scholarship Charity determines that any part of a scholarship grant has been used
for improper purposes, the Scholarship Charity will (i) notify you, (ii) take all reasonable
and appropriate steps to recover the diverted funds and insure the appropriate use of any
remaining grant funds held by the recipient, and (iii) make no further payments or awards
to the recipient unless it has received the recipient's assurances that future diversions will
not occur and has required the recipient to take extraordinary precaution to prevent future
diversions from occurring.

The Scholarship Charity will also maintain and retain complete records relating to all
scholarship grants for a period of four years after each scholarship grant is awarded or
declined. The Scholarship Charity will report to you periodically as well as make these
records available to you at any time. These records will include:

• All information the Scholarship Charity secures to confirm the eligibility of
applicants and evaluate the qualification of potential scholarships grant recipients.

• The identity of each scholarship recipient, the amount of the scholarship grant, and
the expenses funded by the scholarship grant.

• The identity of each rejected applicant and the basis for any determination of
ineligibility.

• The reports received from each scholarship grant recipient.

• Any information which the Scholarship Charity obtains in investigating a possible
diversion of scholarship grant funds; and

• Any other information required to be maintained by applicable law or regulation.

You and the Scholarship Charity will comply with all statues, executive orders, and
regulations that restrict or prohibit persons from engaging in transactions and dealings
with designated countries, entities, or individuals, or otherwise engaging in activities in
violation of economic sanctions administered by OFAC. The Scholarship Charity will
check the OFAC List of Specially Designated Nationals and Blocked Persons for names
of foreign individuals and entities with whom it is dealing to determine if they are included
on the list before paying over any grant funds.

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).

Letter 4793 (10-2012)
Catalog Number 58264E

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.

Letter 4793 (10-2012)
Catalog Number 58264E

• 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

Letter 4793 (10-2012)
Catalog Number 58264E