rr-03-32.pdf

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PART 1

Section 4945---Taxes on Taxable Expenditures

26 CFR 53.4945-4: Grants to individuals.
(Also §117; §1.117-1.)

Rev. Rul. 2003-32

ISSUE

If a private foundation awards educational grants to employees or children
of employees of a particular employer who are victims of a qualified disaster as
defined in §139 of the Internal Revenue Code, and the educational grants do not
satisfy the percentage test of Rev. Proc. 76-47, 1976-2 C.B. 670, are these
educational grants treated as scholarships subject to the provisions of §117 and
not treated as taxable expenditures under §4945(d)(3)?

FACTS

The foundation is exempt from federal income tax under §501(c)(3) and is
a private foundation under §509(a). The foundation has applied under §4945(g)
for approval of its proposed scholarship program. The foundation intends to
provide scholarships to employees or children of employees of a particular
employer if the employee is seriously injured or killed as a result of a qualified
disaster within the meaning of §139(c)(1), (2), or (3). The foundation will
determine whether these criteria are satisfied using objective standards that are
consistently applied.

Section 139(c) provides that the term "qualified disaster" includes (1) a
disaster that results from a terroristic or military action (as defined in §692(c)), (2)
a Presidentially declared disaster (as defined in §1033(h)(3)), or (3) a disaster
that results from an accident involving a common carrier, or from any other event,
which is determined by the Secretary to be of a catastrophic nature.

The group of employees or children of employees from whom grantees
are selected is sufficiently broad to constitute a charitable class. The
foundation's scholarship program will satisfy the requirements of §4945(g)(1) and
the guidelines of §§4.01 through 4.07 of Rev. Proc. 76-47, 1976-2 C.B. 670;
however, the foundation will award grants without regard to the percentage
limitation test of §4.08 of Rev. Proc. 76-47. The foundation intends to make
grants to all eligible applicants.

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LAW AND ANALYSIS

A grant by a private foundation to an individual for travel, study, or other
similar purposes is a taxable expenditure by the private foundation under
§4945(d)(3) unless such grant satisfies the requirements of §4945(g). Such a
grant, awarded on an objective and nondiscriminatory basis pursuant to a
procedure approved in advance by the Secretary, may satisfy the requirements
of §4945(g)(1) if it is demonstrated to the satisfaction of the Secretary that the
grant (i) constitutes a scholarship or fellowship grant that is subject to the
provisions of §117(a) as in effect on the day before the date of the enactment of
the Tax Reform Act of 1986 and (ii) is to be used for study at an educational
organization described in §170(b)(1)(A)(ii).

When an employer makes educational grants available to its employees
on a preferential basis, the employer-employee relationship immediately
suggests that the grant may be compensatory. To ensure that employer-related
grant programs are outside the pattern of employment and, therefore, not
compensatory, substantial factors not related to employment must control and
limit grant programs to such an extent that the preferential treatment derived from
employment does not continue to be of any significance beyond being an initial
qualifier.

Rev. Proc. 76-47, 1976-2 C.B. 670, provides guidelines for determining
whether a grant made by a private foundation under an employer-related grant
program to an employee or to a child of an employee of the particular employer is
a scholarship under §§117 and 4945(g)(1), rather than a form of compensation,
an employment incentive, or an employee fringe benefit. The Service will
assume that grants awarded under an employer-related grant program will be
scholarships or fellowship grants under §§117 and 4945(g)(1) if the program
satisfies the seven conditions in §§4.01 through 4.07 and the percentage test
described in §4.08 of Rev. Proc. 76-47.

Rev. Proc. 76-47, 1976-2 C.B. 670, provides that if an employer-related
private foundation’s educational grant program satisfies the seven conditions of
Rev. Proc. 76-47, §§4.01 through 4.07, but does not meet the percentage test of
§4.08, then all the facts and circumstances will be reviewed in determining
whether the primary purpose of the program is to provide extra compensation or
another employment incentive, or whether the primary purpose is to educate
recipients in their individual capacities.

For this program, employment is the initial, but not the sole, qualifier. An
employee or the child of an employee is eligible for an educational grant only in
the event the employee is seriously injured or killed as a result of a qualified
disaster. These eligibility criteria provide sufficient assurance that the primary
purpose of the grant is to educate recipients in their individual capacities, outside
of any pattern of employment, rather than to compensate employees or provide

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an employment fringe benefit. Therefore, this educational grant program is not
required to satisfy the percentage test of §4.08 because its eligibility
requirements meet the facts and circumstances test of Rev. Proc. 76-47.

HOLDING

Under the facts set forth above, grants awarded under the program satisfy
the requirements of Rev. Proc. 76-47, 1976-2 C.B. 670, and constitute
scholarships subject to the provisions of §117. Therefore, grants awarded under
the program satisfy the requirements of §4945(g)(1) and will not be taxable
expenditures under §4945(d)(3). This revenue ruling does not address the
extent to which the grants meet the requirements of “qualified scholarships” that
may be excluded from the gross income of recipients under §117(a). See Notice
87-31, 1987-1 C.B. 475, for further information relating to the exclusion of
qualified scholarships from gross income.

APPLICATION

This ruling also applies to Revenue Procedure 80-39, 1980-2 C.B. 772,
which provides parallel guidelines for determining whether educational loans
made by a private foundation under an employer-related loan program will satisfy
the requirements of §4945(g)(3) and will not be taxable expenditures under
§4945(d)(3).

DRAFTING INFORMATION

The principal author of this revenue ruling is Janet E. Gitterman of the
Exempt Organizations, Tax Exempt and Government Entities Division. For
further information regarding this revenue ruling, contact Ms. Gitterman at (202)
283-9458 (not a toll-free call).