IRS approves a foundation's employer-related scholarship procedures

Plain-English summary

A private foundation asked the IRS to approve, in advance, the procedures for an
employer-related scholarship program it will run. Private foundations normally owe an
excise tax on grants to individuals for study, but Section 4945(g) exempts such grants
if the IRS approves the award procedures ahead of time and the grants are made
objectively and nondiscriminatorily. This program funds college scholarships for
underserved, financially needy students, including dependent children and
grandchildren of a company's employees, with an independent outside administrator
handling applications and selection through a committee separate from the foundation
and the employer. Because employees' children are eligible, the program must also meet
the safeguards of Rev. Proc. 76-47 (including the 25% or 10% percentage tests) so the
scholarships are not disguised extra compensation. The IRS approved the procedures
under Section 4945(g)(1), so the grants will not be taxable expenditures for the
foundation and will be tax-free scholarships to recipients who use them for qualified
tuition and related expenses under Section 117.

Ruling snapshot

• Question: Do the foundation's employer-related scholarship procedures qualify for advance approval under § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC § 4945(d)(3), (g); §§ 117(a), 170(b)(1)(A)(ii); Rev. Proc. 76-47

Full text (IRS public release)

Transcription note: This determination is a scanned document (Letter 4792). Per
the runbook's OCR proofreading duty, obvious scanning misreads have been corrected
to the letter's standard wording; genuinely unreadable spots are marked [illegible];
blanks where the IRS redacted identifying details (award amounts, percentage caps,
etc.) are left as gaps. Wording is otherwise reproduced verbatim.

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
IRS   P.O. Box 2508
      Cincinnati, OH 45201

                                                     Date: January 11, 2022

Number: 202214017                                    Taxpayer ID number:
Release Date: 4/8/2022
                                                     Person to contact:
                                                       Name:
                                                       ID number:
                                                       Telephone:
                                                     LEGEND       UIL: 4945.04-04
                                                     B = Company
                                                     C = Organization
                                                     D = State
                                                     E = Scholarship Program
                                                     x dollars = Amount
                                                     y dollars = Amount
                                                     z dollars = Amount

Dear                    :

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

This approval is required because IRC Section 4945 provides for the imposition of taxes on each taxable
expenditure of a private foundation. IRC 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 IRC Section
4945(g).

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.

Awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if

Letter 4792
Catalog Number 58263T

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 establish and operate an individual scholarship grant program called E. The
purpose of E is to provide scholarship grants to underserved, financially needy individuals, including the
dependent children and grandchildren of B employees, that meet the eligibility requirements of E.

You have contracted with C to administer and manage E. C will:

design/install/maintain a web-based application for your program,
receive/process applications,
review submissions,
determine eligibility of applicants,
select scholarship grant recipients,
notify all applicants,
pay awards to recipients, and
provide customer service to students, parents, school officials, and other stakeholders.

The scholarship will not be used by you or B to recruit employees or induce employees to continue their
employment.

The selection of grant recipients will be made by a committee of individuals chosen and directed solely by C.
Members of the selection committee will be knowledgeable in the education field and have the background and
knowledge to properly evaluate the potential of applicants. The selection committee will be totally independent
and separate from you or B.

Selections of recipients will be forwarded by C's selection committee to you solely to verify the recipients'
eligibility requirements and the selection criteria followed by C's selection committee in considering the
applicants and in making selections.

You will annually award up to x dollars in college scholarship grants to qualified students in award increments of
y dollars per student. A scholarship may be renewable for three additional years, for a total award of z dollars per
student. The scholarship grants will be paid directly to the recipients. C will confirm school enrollment of
recipients prior to disbursement of grant awards, both for initial grants and renewed grants.

Your scholarship program imposes minimum requirements for scholarship grant eligibility. The following
requirements are placed on applicants:

a. Be: (i) a minority self-identifying as Black or African American, American Indian or Alaska Native,
   Hispanic or Latino, Asian, Native Hawaiian or other Pacific Islander; (ii) veterans; (iii) disabled; or (iv)
   self-identifying as LGBTQ+;
b. Be a high school (including public, charter, private, parochial, home school, or any combination of the
   list) senior or graduate or current undergraduate at an accredited two- or four-year college, university, or
   technical/trade school located in the state of D;
c. Be a resident of D;
d. Be a US citizen;

Letter 4792
Catalog Number 58263T

e. Have a minimum grade point average of 2.5 on a 4.0 scale or its equivalent; and
f. Plan to be enrolled in, and/or attend, a full-time undergraduate course of study at an accredited two- or
   four-year post-secondary school, college or university located in the state of D.

Applicants that are dependent children and grandchildren of B employees must be the dependent children or
grandchildren of active B employees (full- or part-time) as of the application deadline date. The number of new
scholarship grants for children and grandchildren of B employees in any year is limited to no more than the
greater of (i)          scholarships, or (ii)          % of the total number of dependent children and grandchildren of B
employees who are eligible, are applicants for such scholarship grants, and are considered by the independent
selection committee chosen and directed solely by C.

Scholarship grants are renewable up to three years or until a bachelor's degree is earned. To qualify for a renewed
scholarship grant, the recipient must have satisfactory academic performance, maintaining a cumulative grade
point average of 2.5 on a 4.0 scale. The recipient must maintain full-time enrollment at an accredited two- or
four-year college or university located in the state of D. Renewal will not be denied because the recipient's parent
or guardian had previously terminated employment with B.

The scholarship program will be publicized through a webpage managed by C, and B's social media accounts,
internal webpages, and website. All applicants must complete and submit a web-based application. The
completed application packages are then reviewed by the selection committee, which is appointed by C.

The selection committee will select recipients based on how the applicants demonstrate their potential for future
academic performance and college completion, as well as consideration of past academic performance, the
strength of their recommendation and personal statement, unusual personal or family circumstances, involvement
and leadership in school and community activities, work experience, and other relevant criteria. Financial need
will be considered. Recipients will be selected from a pool of qualified applicants with primary consideration
given to those who demonstrate the greatest need.

You represent that you will complete the following:

* Arrange to receive and review grantee reports annually and upon completion of the purpose for which the
  grant was awarded,
* Investigate diversion of funds from their intended purposes,
* 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
* 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:

* Maintain all records relating to individual grants including information obtained to evaluate grantees,
* Identify whether a grantee is a disqualified person,
* Establish the amount and purpose of each grant, and
* Establish that you undertook the supervision and investigation of grants

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.

Letter 4792
Catalog Number 58263T

However, a grant that meets all 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 (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 either the applicable percentage tests described in Section 4.08 of
Rev. Proc. 76-47 or relevant facts and circumstances, 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 (or relevant facts and circumstances). These tests require that:

* 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
* The number of grants awarded to employees' children in any year won't exceed 10% of the number of
  employees' children who were eligible for grants (whether or not they submitted an application), or
* The relevant facts and circumstances to ensure the primary purpose of the program is not to provide
  extra compensation or other employment incentive and the primary purpose is to educate recipients in
  their individual capacities.

You represented that your procedures for awarding grants under this program will meet the requirements of
Rev. Proc. 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 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 (or relevant facts and
  circumstances). If you establish another program covering the same individuals, that program must
  also meet the percentage tests (or relevant facts and circumstances).
* 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 IRS at:

Letter 4792
Catalog Number 58263T

Internal Revenue Service
Exempt Organizations Determinations
TE/GE Stop 31A Team 105
P.O. Box 12192
Covington, KY 41012-0192

* You can't 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'll make this determination letter available for public inspection after deleting personally identifiable
information, as required by IRC Section 6110. We've enclosed Letter 437, Notice of Intention to Disclose -
Rulings, and a copy of the letter that shows our proposed deletions.

* If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us.
* If you agree with our deletions, you don't need to take any further action.

Please keep a copy of this letter in your records.

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

Enclosures:
Letter 437

Letter 4792
Catalog Number 58263T