IRS approves a company foundation's employer-related scholarship procedures under 4945(g)(1)

Plain-English summary

A private foundation tied to a company asked the IRS to pre-approve the way it runs an employer-related scholarship program. The program pays for the college education of the children of the company's employees. This advance approval matters because when a private foundation gives grants to individuals for study, those grants are normally "taxable expenditures" that trigger an excise tax under Section 4945, unless the IRS approves the selection procedures ahead of time. The foundation described objective, nondiscriminatory procedures: an independent selection committee unconnected to the company, criteria like academic achievement and financial need, awards renewable for up to four years if the student keeps a 2.5 GPA, and commitments to supervise the grants and keep records. It also represented that it would meet the percentage-limit tests of Revenue Procedure 76-47 that keep employer-tied scholarships from being disguised compensation. The IRS approved the procedures. As a result, grants made under them are not taxable expenditures, and they are tax-free scholarships to the students under Section 117(a) if used for qualified tuition and related expenses.

Ruling snapshot

• Question: Do the foundation's employer-related scholarship procedures qualify for advance approval under IRC § 4945(g)(1)?
• Outcome: Approved
• Key authorities: IRC §§ 4945(g)(1), 4945(d)(3), 117(a); Rev. Procs. 76-47 and 85-51

Full text (IRS public release)

Department of the Treasury Date: 08/10/2022
Internal Revenue Service
Tax Exempt and Government Entities Taxpayer ID number:
P.O. Box 2508
Cincinnati, OH 45201

Person to contact:

Number: 202244013
Release Date: 11/4/2022

LEGEND UIL: 4945.04-04
U = company
v = number 1
w = number 2
X = city/state
y dollars = amount 1
z dollars = amount 2

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
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 operate an employer-related grant program to provide financial assistance to
enable U employees' children to pursue postsecondary degrees at accredited higher educational institutions.
Advertising will consist of internal company communications sent to eligible employees working at U as of

Available funding will affect the total number and amount of grants, but you anticipate awarding between v and
w grants worth between y and z dollars annually; renewable up to four years for recipients who maintain at least
a 2.5 GPA and provide verified transcripts from their educational institutions. These reports will not be
required, however, for grants paid directly to recipients' educational institutions that agree to use funds for their
intended purposes for recipients in good standing only.

Eligible applicants must submit a completed application that includes recommendation letters from instructors,
standardized testing scores and FAFSA results, in addition to participating in a personal interview. You will
require a survey or questionnaire to determine who can be shown to be eligible for your grants without
submitting a complete application. Selection criteria will include academic achievement, financial need, high
school attended, as well as personal character and perceived motivation, ability, and potential for academic
success.

An independent selection committee consisting of individuals from the X area with experience in business,
education, or the nonprofit sector will choose your recipients. Recipients must provide proof of enrollment in
accredited postsecondary educational institutions prior to the release of grants.

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 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 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.

• 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 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:

• The number of grants awarded to employees' children in any year won't exceed % 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 % 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 % 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
Rev. Proc. 85-51, when applying the % test to employees' children.

In determining how many employee children are eligible for a scholarship under the % 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:

• 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. 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 IRS at:
  Internal Revenue Service
  Exempt Organizations Determinations
• 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 (Rev. 1-2022)
Catalog Number 58263T