Employer-related scholarship procedures received advance approval

Plain-English summary

A private foundation proposed a renewable scholarship program for children of an employer's owner-operators, employees, and contractors. An independent committee would evaluate academic involvement, financial need, essays, community service, recommendations, grades, financial-aid information, and family income. Awards would be paid directly to educational institutions, and recipients would not have to perform services. The foundation represented that it would monitor the grants, address diverted funds, keep records, and satisfy the employer-related scholarship percentage tests. The IRS approved the procedures under section 4945(g)(1), so grants made as proposed would not be taxable expenditures, and qualifying tuition awards would not be taxable to recipients under section 117(b).

Ruling snapshot

• Question: Did the proposed employer-related scholarship procedures satisfy the advance-approval rules for grants to individuals?
• Outcome: approved
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(d)(3), and 4945(g)(1); Rev. Procs. 76-47 and 85-51

Full text (IRS public release)

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

Date: 10/02/2023

Taxpayer ID number:

Person to contact:
Name:
ID number:
Telephone:

Release Number: 202352023
Release Date: 12/29/2023

LEGEND

B = Employer
C = Scholarship Committee
d = Number of Total Employees
e = Number of Employees with Eligible Children
f = Number Scholarships Given
g = Voting Members
w dollars = Award
x dollars = Maximum
y dollars = Total Awarded
z dollars = Combined Family Income

UIL: 4945.04-04

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 a scholarship program.

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T

The purpose of your program is to aid students whose family members are owner-operators or employees at B
to attain an undergraduate institution and /or trade school education. The scholarship is open to the children of
over d employees and/or contractors. At any given time, you estimate around e employees and/or contractors to
have an eligible student attending secondary schooling. C operates your program and gives out the grants.

You will grant between w dollars for each recipient per school year. The maximum amount a recipient can
receive is x dollars per year with y dollars in aggregate. However, it can be less depending on available funding.
You will provide between f scholarships per year.

You will not provide educational loans. You will publish your program on your website and social media
channels.

You will disburse the funds directly to the recipient’s educational institution.

To be eligible for a scholarship, the student must demonstrate academic involvement and financial need, and
submit application questions. C will evaluate applicants based on their:

• high school diploma

• enrollments of higher education at a two-year or four-year institution or trade school

• Responses to essay questions

• Community involvement

• Letter of recommendation

• GPA (applicants with a GPA of 3.25 or above will be given higher consideration)

• FAFSA report and

• Combined family income under z dollars.

These grants are renewable. The grantee must submit their transcript to reapply for another year. Grantees can
lose their scholarship ability based on unsatisfactory academic performance, expulsion for academic, moral, or
criminal offenses, or upon request. The grantees do not need to perform any services for the grant that is
awarded them.

C has g or more voting members at all times. Each member of C signs a conflict-of-interest agreement. You
choose new committee members by interview and recommendation.

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.

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T

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 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).

• 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 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 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 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 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:

• 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.

Letter 4792 (Rev. 1-2022)
Catalog Number 58263T

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
    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 (Rev. 1-2022)
Catalog Number 58263T