A private foundation gets advance approval for changes to both its regular and employer-related scholarship programs

Plain-English summary

A private foundation had already gotten IRS approval for two scholarship programs and wanted to make material changes to both, so it asked the IRS to re-approve its award procedures under section 4945(g). This matters because a private foundation that gives money to individuals for study normally makes a "taxable expenditure" subject to excise tax under section 4945, unless the IRS approves the procedures in advance. One program is a general scholarship; the other is employer-related, meaning it can benefit the children of a particular company's employees, which draws extra scrutiny so it does not become a disguised fringe benefit. The IRS approved both sets of revised procedures. For the employer-related program it relied on Revenue Procedure 76-47: an independent selection committee will pick recipients, the grants won't be used to recruit or retain employees, awards won't be tied to studies that benefit the employer, and the program will meet the 25 percent or 10 percent numerical limits. As a result, grants under either program are not taxable expenditures, and they are tax-free scholarships to the students if used for qualified tuition and related expenses under section 117.

Ruling snapshot

• Question: Should the IRS grant advance approval of the foundation's revised regular and employer-related scholarship procedures under section 4945(g)?
• Outcome: Approved (both programs meet IRC § 4945(g)(1); grants are not taxable expenditures)
• Key authorities: IRC § 4945(d)(3), § 4945(g)(1); § 117(a)-(b); § 170(b)(1)(A)(ii); Rev. Proc. 76-47; Rev. Proc. 85-51

Full text (IRS public release)

Department of the Treasury
Fy) Internal Revenue Service

Tax Exempt and Government Entities
IRS P.O. Box 2508

Cincinnati, OH 45201
Date: August 10, 2021

Taxpayer ID number:

Number: 202144031

Release Date: 11/5/2021 ee
Name:
ID number:
Telephone:

LEGEND UIL: 4945.04-04

B= Program #1

C= Program #2

D= Unrelated Charity #1

E= City

G= Company

H= Unrelated Charity #2

Dear

You asked for advance approval of your scholarship procedures under Internal Revenue Code (IRC) Section 4945(g)(1). You requested approval of your scholarship program to fund the education of certain qualifying students. You also asked for advance approval of your employer-related scholarship procedures under Section 4945(g)(1).

This approval is required because IRC Section 4945 provides for the imposition of taxes on each taxable expenditure of a private foundation. Section 4945(d)(3) provides that the term "taxable expenditure" includes any amount paid or incurred by a private foundation as a grant to an individual for travel, study, or similar purposes by the individual, unless the grant satisfies the advance approval requirement of Section 4945(g).

Our determination

We approved your procedures for awarding scholarships. Based on the information you submitted, and assuming you will conduct your program as proposed, we determined that your procedures for awarding scholarships meet the requirements of IRC Section 4945(g)(1). As a result, expenditures you make under these procedures won't be taxable.

Letter 4792 (Rev. 4-2021)
Catalog Number 58263T

Additionally, 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 providedin IRC Section 117(b)).

We also 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.

Awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipientsif they use them for qualified tuition and related expenses (subject to the limitations provided in IRC Section 117(b)).

Description of your requests
Your letter indicates you will make changes to your previously approved scholarship programs called B and C.

Material changes made to B consist of the following:
e Applicants are required to submit a 2,000 word, instead of a 500-word, essay on a subject selected by you along with a completed Medical College Scholarship Application form. e The selection committee consists of one foundation representative and will no longer include a qualified education in the field of medicine.

Material changes made to C consist of the following:

1. Scholarship awards are available to the following:

e Graduates of three identified high schools, or

e Students referred by a local school or non-profit organization in E, or

e Children of employees of other Christian missionary organizations including D, or e Children of full-time employees of G, or

e Qualified applicants as determined by your trustees.

es Scholarship recipients must apply their award toward tuition, fees for enrollment, books, supplies, equipment for courses, attendance at an accredited two-year, four-year, or graduate-level educational institution.

a. The scholarships will be announced by mailing notices to organizations listed above, local schools and on your website. Candidates will apply on-line via the H organization’s website or your website.

Applicants must provide the following:
e Personal information,
2,000-word essay,
High School or college transcript
ACT Score Report
College or University acceptance letter,

Letter 4792 (Rev. 4-2021)
Catalog Number 58263T

e Two letters of recommendation, and
e Name of parent employed by G, if applicable.

4. An initial review of the applications will be conducted before any applicant is considered by the
   scholarship committee. This will confirm that each applicant is an upright, self-motivated, and high performing individual and is aligned with certain of your core values including a demonstrated commitment to a faith and a love of country. In regard to your scholarship committee, no members shall be in a position to derive a private benefit, directly or indirectly. Grants are to be awarded solely by the committee and its decisions are final.

You represent that you will complete the following:

e Arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded,

e Investigate diversion of funds from their intended purposes,

e Take all reasonable and appropriate steps to recover the diverted funds and ensure other grant funds held by a grantee are used for their intended purposes, and

e 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 diversion from occurring.

You also represent that you will:
e Maintain all records relating to individual grants including information obtained to evaluate grantees, e Identify a grantee is a disqualified person, e Establish the amount and purpose of each grant, and

e Establish that you undertook the supervision and investigation of grants described above.

Basis for our determination

IRC Section 4945 imposes excise taxes on the taxable expenditures of private foundations. 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 the following requirements of IRC Section 4945(g) is not a taxable expenditure.

e The foundation awards the grant on an objective and nondiscriminatory basis.

e The IRS approves in advance the procedure for awarding the grant.

e The grant is a scholarship or fellowship subject to the provisions of 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).

For your employer-related scholarship program:

e The foundation awards the grant on an objective and nondiscriminatory basis.

e The IRS approves in advance the procedure for awarding the grant.

e The grant is a scholarship or fellowship subject to IRC Section 117(a).

e The grant is to be used for study at an educational organization described in IRC Section 170(b)(1)(A)(ii).

Letter 4792 (Rev. 4-2021)
Catalog Number 58263T

Revenue Procedure (Rev. Proc.) 76-47, 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 Rev. Proc. 76-47 and meets the percentage tests described in Section 4.08 of Rev. Proc. 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% or 10% percentage test in Rev. Proc. 76-47. These tests require that:

e The number of grants awarded to employees' children in any year won't exceed 25% 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

e The number of grants awarded to employees' children in any year won't exceed 10% of the numberof employees' children who were eligible for grants (whether or not they submitted an application), or

e The number of grants awarded to employees in any year won't exceed 10% of the number of employees who were eligible for grants, were applicants for grants, and were considered by the selectioncommittee for grants.

You further represented that you will include only children who meet the eligibility standards described in Rev. Proc. 85-51, when applying the 10% test to employees' children.

In determining how many employee children are eligible for a scholarship under the 10% 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 Rev. Proc. 76-47. In particular:

e 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

e This determination only covers the grant programs 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.

e This determination is in effect if your procedures comply with Sections 4.01 through 4.07 of Revenue Procedure 76-47 and 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.

We've sent a copy of this letter to your representatives as indicated in your power of attorney.

Please keep a copy of this letter in your records.

Letter 4792 (Rev. 4-2021)
Catalog Number 58263T

If you have questions, you can contact the person shown at the top of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

cc:

Letter 4792 (Rev. 4-2021)
Catalog Number 58263T