Employee-children merit scholarships approved

Plain-English summary

A private foundation proposed merit scholarships for children of employees of a company and its subsidiaries. An independent nonprofit will run the academic competition, select finalists, administer awards, confirm college enrollment, make payments through financial-aid offices, and monitor scholarship use. Eligibility will not depend on an employee's position or duties, the program will not be used for recruiting, and an award will not end if the parent later leaves employment. The IRS approved the procedures under section 4945(g)(1). Approval remains subject to the employer-related scholarship conditions and percentage tests in Revenue Procedure 76-47.

Ruling snapshot

• Question: Do the employer-related merit scholarship procedures satisfy section 4945(g)(1) and Revenue Procedure 76-47?
• Outcome: Approved
• Key authorities: IRC §§ 117, 170, and 4945; Rev. Proc. 76-47; Rev. Proc. 85-51

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 03/12/2025
Tax Exempt and Government Entities Taxpayer ID number:
IRS P.O. Box 2508
Cincinnati, OH 45201 Person to contact:

Release Number: 202523011
Release Date: 6/6/2025

LEGEND UIL: 4945.04.04
B =Name

C =Name

E =Number

F =Number

G =Number

J =Number

K =Name

L =Name

Y=Number

x 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
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 children of B employees. Each scholarship is
for x dollars per year for Y years or until their baccalaureate degree requirements are met, whichever comes

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

first. The annual academic competition is conducted through the C, an independent not-for-profit organization.
C's purposes are to identify and honor exceptionally able high school students and provide a system of services
for corporations, foundations, and other organizations that wish to sponsor college undergraduate scholarships
for outstanding students who interest them. All aspects of the selection of winners and the administration of
their awards are handled by C.

Only high school students that are children of employees at B and its subsidiaries can compete for these
scholarships. To participate in the program students must take the K in the specified year of their high school
program. Students who plan to spend the usual four years in high school before entering college full time must
take the K in their third year of high school.

To enter the competition for this scholarship the student must take the K on the date their school chooses for the
administration. If a student is unable to take K, they may still be able to enter the competition by contacting C
regarding an alternate entry request.

Each year E students enter the scholarship competition by taking the K. Out of these E students, approximately
F students are designed as semifinalists. These students may advance to the finalist level by confirming their
scores on a second test, the SAT, and by submitting an application form that includes a high school record
showing strong academic performance, a personal essay, extra-curricular accomplishments and the
recommendations of their school principal or school official designed by the principal.

Of the F students who are designated as semifinalists, about G attain finalist status. Finalists may be considered
for one of approximately J Merit Scholarships sponsored by the corporations; private foundations; and other
sponsors, such as you.

C selects students from among those children of employees who attained the finalist level in the L Scholarship
Program to receive foundation-sponsored merit scholarships.

Scholarships under finalist only program are not used as a means of inducement to recruit employees. A
student's eligibility is determined at the time the scholarship award is offered and a scholarship will not be
terminated if the student's parents or relative subsequently terminates employment. The student's eligibility may
not be conditioned on any other employment related factors such as the parent's position, service or duties. The
prior employment period for establishing eligibility may not exceed three years.

C administers all aspects of the program and bears all administrative costs. Scholarship recipients are selected
by an independent selection committee. C confirms the individual scholarship recipient's enrollment at a college
or university in the United States that holds accredited status with a regional accrediting commission on higher
education, makes payments of the award through the financial aid office of the institution, and supervises and
investigates the use of the scholarship by the recipients in their educational program.

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.

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

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 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.

• The effective date of our approval is February 21, 2024, 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

• 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

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