Employer-related scholarship procedures received advance approval

Plain-English summary

A private foundation proposed one-time scholarships for eligible dependents of employees of a company. An outside administrator would manage applications, due diligence, selection, payments to schools, supervision, and reporting. Applicants would be evaluated on academics, leadership, school and community activities, goals, personal or family circumstances, outside appraisals, and financial need. The foundation represented that the program would satisfy the employee-child percentage limits in Rev. Proc. 76-47, use an independent selection committee, avoid recruiting or continued-employment conditions, and not restrict recipients to studies benefiting the foundation or employer. The IRS approved the procedures under IRC § 4945(g)(1), conditioned on continued compliance with the revenue procedure and its percentage tests.

Ruling snapshot

• Question: Do the employer-related scholarship procedures satisfy the advance-approval requirements of section 4945(g)(1)?
• Outcome: Approved, subject to Rev. Proc. 76-47 and its percentage tests
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)(1); Rev. Proc. 76-47; Rev. Proc. 85-51

Full text (IRS public release)

Date:
Department of the Treasury
Internal Revenue Service 02/06/2025
Tax Exempt and Government Entities Taxpayer ID number:
IRS P.O. Box 2508 Person to contact:

Cincinnati, OH 45201 Name:
ID number:

Telephone:

Release Number: 202518019
Release Date: 5/2/2025

LEGEND UIL: 4945.04-04
B = Program

C = Administrator

D = Company

F = number

g=%

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 scholarship program called B. You have contracted with C to manage and administer the program. C is responsible for the implementation of an online application, due diligence, evaluation, selection, notification of award to recipients, authorized distribution of the awards to educational institutions, and providing management reports to summarize program activity and impact.

Your purpose is to award one-time scholarships annually to eligible dependents of employees of D. You will confirm eligibility for B’s applicants, promote the program and cooperate to ensure that B is objective and

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

To be eligible for the scholarship, applicants must: (a) be dependent children, age 26 and under, of a full-time D employee in the United States who have a minimum of one year of employment with D as of the application deadline; (b) high school seniors, graduates, or current undergraduate; and (c) plan to enroll in full-time undergraduate study at an accredited two-year or four-year college, university, or vocational-technical school for the upcoming academic year. Award recipients are not subject to any employment requirements in order to be eligible for the scholarship.

You will use C's recipient selection criteria, including consideration of academic performance, demonstrated leadership and participation in school and community activities, a statement of career and educational goals and objectives, unusual personal or family circumstances and an outside appraisal. Financial need will also be considered.

You plan to award F one-time annual scholarships, but that number may be increased or decreased in the future as determined by your board. The number of scholarships you award in any year will not exceed g of the eligible dependents who applied for aid and were considered by the selection committee in a given year. Past recipients may not reapply for the scholarship.

C will be responsible for obtaining reports, transcripts, and other documents required for proper supervision, and providing all such documentation to you. There will be procedures in place to seek refunds of funds distributed in the event of any violations warranting such action.

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).

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

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.

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.

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

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