C.18. Employer — Publication 5590

(1) Many private companies have established private foundations to fund scholarship

programs for employees and/or their children. These employee educational grants appear to be compensation, and the educational grants to the children of the employees appear to be compensation or provide an employment incentive to the employee-parents. Therefore, grants made by the private foundations pursuant to these employer-related scholarship programs are not scholarships or fellowship grants subject to Section 117(a) and are taxable expenditures pursuant

to Section 4945(d)(3). Nonetheless, if a private foundation satisfies seven conditions and a percentage test outlined in Rev. Proc. 76-47, 1976-2 C.B. 670, and further clarified by Rev. Proc. 85-51, 1985-2 C.B. 717, the IRS will assume the contrary. These requirements are summarized below as follows (for further detail, see the cited revenue procedures):

a. Inducement: the employer-related scholarship program must not be used by

the employer and the private foundation as an inducement to recruit or retain employees to continue their employment;

b. Selection Committee: must be comprised of individuals totally independent

and separate from the private foundation and the employer. These individuals may not be employees or former employees and should be knowledgeable in the educational field;

c. Eligibility Requirements: must be related to the purpose of the grant program.

Potential recipients must be able to meet the admission requirements of and attend an educational organization. If a minimum period of employment is required to qualify for such scholarships, this period may not exceed three years;

d. Objective Standard: selection must be based upon objective standards that

are unrelated to employment of the recipient or to the employer’s line of business;

e. Employment: once awarded, a scholarship may not be terminated if the

recipient (or his/her parents) is no longer employed with that employer;

f. Course of Study: the courses of study for which the scholarship are available must not be limited to those that would benefit the employer or private foundation;

g. Other Requirements: the employer-related scholarship program must meet all

other requirements of Section 117 and the regulations thereunder; and

h. Percentage Test: if the employer-related scholarship program provides grants

to employees’ children, the scholarships awarded must not exceed: (i) 25% of the number of employees’ children who were eligible, applied for scholarships, and were considered by the selection committee in selecting the recipients; or (ii) 10% of the number of employees’ children who were eligible (whether or not they submitted an application) in that year. See Rev. Proc. 85-51, 1985-2 C.B. 717 for requirements in determining the number of employees’ children who can be eligible recipients for purposes of the 10% test. If the employer-related scholarship program provides grants to employees, the scholarships awarded must not exceed 10% of the number of employees who were eligible, were applicants for such grants, and were considered by the selection committee in selecting the recipients of grants in that year.

i. If the employer-related scholarship program satisfies the seven conditions but not the percentage test, the program may nevertheless qualify if, in view of all

the facts and circumstances, its primary purpose is to educate recipients in their individual capacities. See Section 4 of Rev. Proc. 76-47 for facts and circumstances test requirements. See Rev. Rul. 86-90, 1986-2 C.B. 184 for application of the facts and circumstances test to a program involving one scholarship awarded to a child in an employee pool of thousands.

(2) Only employer-related grant programs must satisfy Rev. Proc. 76-47. An

employer-related grant program is defined as a program that:

a. Treats some or all the employees (or their children) of a particular employer

as a group from which recipients of some or all the private foundation’s grants will be selected;

b. Limits the potential recipients to individuals who are employees (or their

children) of a particular employer; or

c. Otherwise gives such individuals a preference or priority over others in being

selected as recipients of such grants.

(3) For specific examples, see the following guidance:

a. Rev. Rul. 79-131, 1979-1 C.B. 368, holds that an employer-funded

scholarship program for all students in a community is not an employerrelated grant program as defined in Rev. Proc. 76-47.

b. Rev. Rul. 79-365, 1979-2 C.B. 389, holds that a private foundation’s

scholarship program for children of deceased or retired employees of a particular company is an employer-related scholarship program within the scope of Rev. Proc. 76-47.

c. Rev. Rul. 81-217, 1981-2 C.B. 217, which held that scholarship programs in

which a public charity also had involvement were employer-related programs under Rev. Proc. 76-47.

d. Rev. Proc. 94-78, 1994-2 C.B. 833, permits rounding off of the number of

employer-related scholarship or loan grants.

e. Rev. Rul. 2003-32, 2003-1 C.B. 689, which held that a scholarship program

for employees or children of employees of a particular employer if the employee was seriously injured or killed as the result of a qualified disaster was an employer-related program that met the requirements of Rev. Proc. 7647.

(4) Long-term or short-term educational loans made under an employer-related

educational loan program may qualify as grants described in Section 4945(g)(3), provided they meet the requirements in Rev. Proc. 80-39, 1980-2 C.B. 772. The requirements of Rev. Proc. 80-39 are essentially the same as those in Rev. Proc. 76-47 (concerning educational grants). If a private foundation's employer-related program encompasses educational loans and scholarship or fellowship grants to the same group of eligible employees or employees' children, the percentage tests apply to the total number of individuals receiving combined grants of

scholarships, fellowships, and educational loans. For more details, see Rev. Proc. 80-39.