IRS approves an employer-related scholarship program for employees' children

Plain-English summary

A private foundation asked the IRS to approve, in advance, an employer-related
scholarship program that funds college for the children of a company's
employees. Under Section 4945, a foundation's grants to individuals for study
are taxable expenditures unless the IRS pre-approves the procedures under
Section 4945(g). Employer-tied scholarships get extra scrutiny because they can
look like disguised compensation, so the IRS applies the seven conditions and
percentage limits of Revenue Procedure 76-47: an independent selection
committee, merit-based criteria, no use of the scholarship to recruit or retain
employees, and a cap so that awards do not exceed 25% (or 10%) of eligible
applicants. The foundation represented it would meet those conditions, expand
eligibility to children of domestic and international subsidiaries, and screen
international recipients through the Office of Foreign Assets Control. The IRS
approved the procedures under Section 4945(g)(1), so the grants are not taxable
expenditures and are tax-free scholarships to the students under Section 117
when 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) and the Rev. Proc. 76-47 guidelines?
• Outcome: Approved
• Key authorities: IRC § 4945(g)(1); IRC § 4945(d)(3); IRC § 117(a)-(b); IRC § 170(b)(1)(A)(ii); Rev. Proc. 76-47; Rev. Proc. 85-51

Full text (IRS public release)

Department of the Treasury                          Date: 06/13/2024
Internal Revenue Service
Tax Exempt and Government Entities
P.O. Box 2508
Cincinnati, OH 45201                                Person to contact:

                                                    Taxpayer ID number:

                                                      Name:
                                                      ID number:
Release Number: 202425019                           Telephone:
Release Date: 6/21/2024
LEGEND UIL: 4945.04-04

W = Name
X = Name
Y = State
r = Number
s dollars = Dollar Amount
t dollars = Dollar Amount
u = Number

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 for eligible children of employees of W. Your
scholarship is called the X. Your scholarship initially only included children of employees of your principal
office in the State of Y. You are now expanding your program to include children of the employees of your
domestic and international wholly owned operational subsidiaries. You may award up to r scholarships per year,
limited to no more than s dollars each. The maximum dollar amount of scholarships per year will be t dollars.

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

Applicants will include children, stepchildren, legally adopted children under legal guardianship of your
employees. Each applicant must be a high school graduate or on course to graduate from high school and attend
college. The children must be u years of age or under, of a full-time or part-time employees of W, who have a
minimum of one year employment. The scholarship will not be used as an inducement of employment for
parents and if the parent no longer becomes employed with W, for any reason, the scholarship will not be
rescinded.

The scholarship will be based on the academic merit of the recipient. Each applicant must go through an
application process and selection will be based on the quality of the essay submitted with the application, future
potential and leadership ability, academic performance, extracurricular activities, and civic involvement. A
character interview may also be conducted. The scholarships are renewable, and previous recipients are entitled
to reapply in subsequent years.

You will publicize the scholarship program to employees using: (i) printed announcements and posters, (ii) W's
newsletter, (iii) W's email system and/or (iv) W's website.

Your selection committee is determined by your board of directors. It will consist of at least          members, and
relatives of your selection committee members are not eligible to apply for the scholarship. You have indicated
you will maintain records to ensure the funds provided will continue to be used for the purposes they were
intended. You have procedures in place if it is discovered that funds have been misused. You have also
indicated that prior to payment of all international awards, all parties will be verified with the Office of Foreign
Assets Control to confirm that none of the individuals or entities involved have been identified as supporting or
engaging in terrorist activities.

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).

Letter 4792 (Rev. 1-2022)
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
         .
+ 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.

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.
+ The effective date of our approval is          which is the date your request was submitted.
+ 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

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

+ 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.

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, 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