Company scholarship programs are usually administered by company-created private foundations. These foundations may give preference in awarding scholarships to employees, the children or relatives of employees, or the children of deceased or retired employees of the company or related companies. Scholarship grants awarded by these private foundations are taxable expenditures unless the grant programs meet the requirements for individual grants and receive advance approval from the Service.
Company scholarship programs will not qualify if grants are essentially providing extra pay, an employment incentive, or an employee fringe benefit. Similarly, if scholarship programs are compensatory in nature, an organization administering such a program will not qualify for tax exemption because it is operated for private benefit. A private foundation administering such a program could also be involved in direct or indirect self-dealing.
Company-related scholarship programs can meet the scholarship requirements by ensuring that the scholarships awarded are for the main purpose of furthering the recipients' education rather than compensating company employees. Certain conditions and tests must establish three facts:
- The preferential treatment derived from employment must not have any significance beyond that of an initial qualifier,
- The selection of scholarship grantees must be controlled and limited by substantial non-employment related factors, including a selection committee of individuals who are independent and separate from the private foundation, its organizer, and the employer concerned, and
- There must exist only a limited probability that qualified employees or their children will receive scholarship grants.
Ruling requests for advance approval of procedures are to be sent to the Exempt Organizations Division, and should include the statements described under Grants to Individuals , in addition to information responsive to the seven conditions and the percentage test described in Approval of company scholarship programs.