Revenue Procedure 76-47: Approval, Seven Tests, and Percentage Limits

Revenue Procedure 76-47 sets out the IRS rules a private foundation must follow so that employer-related scholarships awarded to employees or their children are treated as tax-free educational grants rather than taxable expenditures under Section 4945 of the Internal Revenue Code. A program that meets every requirement produces qualified scholarships. A program that misses one exposes the foundation to an initial excise tax of 20% on each noncompliant grant, rising to 100% if the problem is not corrected.¹

The requirements sort into three groups: getting the program approved before any money moves, running it under seven qualitative rules, and staying within one of two numerical caps on how many grants go out each year.

Get the Program Approved Before Any Grant Is Made

Section 4945(g) requires that individual grants be made “pursuant to a procedure approved in advance by the Secretary” to avoid taxable-expenditure treatment.¹ The foundation has to show three things: that its procedures award grants on an objective and nondiscriminatory basis, that they are designed to make sure grantees actually use the funds for the intended educational purpose, and that the foundation will supervise grants and follow up on whether recipients fulfilled the grant terms.²

Approval is requested on Form 8940 (Request for Miscellaneous Determination) with Schedule C, filed electronically through Pay.gov. A user fee, published each year in the IRS revenue procedure on user fees, is due at the time of filing.³ Approval covers the foundation’s entire grant-making system rather than each individual program, so a new program that does not differ materially from what was originally approved does not need its own separate approval.²

If the IRS has not responded within 45 days of a properly submitted request, the procedures are treated as approved from the submission date until the foundation receives actual notice otherwise. If the IRS has already told the foundation its procedures are unacceptable and the foundation awards grants anyway, every one of those grants is automatically a taxable expenditure.⁴

The Seven Qualitative Requirements

No Employment Inducement

Section 4.01 sets the principle behind everything else: the program cannot function as a recruitment tool, a retention incentive, or any other mechanism that steers employees toward actions the employer wants. Grants must exist to educate recipients in their individual capacities, not to support the company’s workforce planning.⁵ Every other rule flows from this one. A program that looks like it is buying loyalty or rewarding tenure will be treated as compensation no matter how the paperwork reads.

An Independent Selection Committee

Section 4.02 requires an independent committee to hold sole authority over who receives a scholarship. Every member must be independent of both the employer and the foundation, which means no current employees, former employees, or officers of either can serve. The Revenue Procedure describes members as educators or civic leaders with no financial stake in the outcome.⁵

Independence also matters because Section 4941 prohibits self-dealing, which includes transfers of foundation assets that benefit disqualified persons such as company insiders and their families. A committee that could steer grants toward executives’ children exposes the self-dealer to a 10% excise tax and any foundation manager who knowingly took part to a 5% tax, assessed for each year the violation is not corrected.⁶

A Broad Enough Eligible Class

Section 4.03 requires that the applicant pool be broad enough to qualify as a “charitable class.” The program cannot be designed to channel money to a handful of pre-selected individuals or a single family. Eligibility must open to a meaningful segment of employees or their children based on factors unrelated to the employment itself.⁵

A minimum period of employment is an acceptable eligibility factor, but that minimum cannot exceed three years.⁵ Age and grade-level prerequisites tied to the studies being funded are also fine. Criteria that mirror performance reviews, job titles, or management hierarchies are not. The foundation should also make reasonable efforts to inform eligible people about the program.

Objective Selection Standards

Section 4.04 requires the committee to choose recipients on objective standards unrelated to the applicant’s or the parent’s employment. Acceptable criteria listed in the procedure include prior academic performance, aptitude or ability test scores, instructor recommendations, financial need, and personal interviews.⁵ The committee can weight these factors as it sees fit, so long as the standards stay focused on educational merit.

The IRS looks at outcomes, not only written policies. A program that uses legitimate criteria on paper but consistently produces winners from senior management’s families invites reclassification. Each selection needs enough documentation to show the criteria were applied consistently across every applicant.

Grants Independent of the Parent’s Job

Sections 4.05 through 4.07 wall the scholarship off from the parent’s employment status. The foundation cannot terminate a scholarship because the recipient’s parent leaves the employer, and this holds whether the parent quits, is laid off, retires, or is fired for cause.⁵

The scholarship also cannot require the student to work for the employer after graduation. A program that conditions funding on a post-graduation employment commitment is offering a signing bonus, and the IRS treats it that way.⁵

The Percentage Tests

Section 4.08 adds a numerical cap. The foundation must clear one of two tests:

The 25% test. The number of grants awarded in a given year cannot exceed 25% of the eligible individuals who actually applied and were considered by the committee.
The 10% test. The number of grants awarded cannot exceed 10% of all individuals who were eligible for the program, whether they applied or not.

The two tests can produce very different ceilings. If a company has 1,000 eligible children and 200 apply, the 25% test allows up to 50 grants while the 10% test allows up to 100. Which one works better depends on typical application rates.⁵

Renewal Grants Don’t Count

Renewal grants from prior years are excluded from the current year’s percentage calculation. Only new grants awarded during the current cycle count toward the 25% or 10% threshold, so a program built around multi-year scholarships can carry many active recipients without breaching the cap.⁵

If You Miss the Percentages

Missing the numerical thresholds is not automatically fatal. If the program meets all seven qualitative requirements in Sections 4.01 through 4.07 but exceeds the caps, the IRS evaluates the grants on a facts-and-circumstances basis. The real question is whether the primary purpose of the program is to educate recipients or to provide extra compensation and an employment incentive.⁵

The factors the IRS weighs include the program’s funding history, the courses of study covered, how widely the program is publicized, the committee’s actual independence, the specific standards used, and the percentage of eligible applicants who typically receive grants. The IRS also looks at whether any grants go to individuals outside the employer relationship, since some awards outside that circle strengthen the case that the program is genuinely charitable.⁵ This is a safety valve, not a long-term strategy.

What Happens If a Grant Doesn’t Qualify

The penalty structure under Section 4945 escalates quickly. A grant that fails to qualify triggers an initial excise tax of 20% of the grant amount. The taxable period runs from the date of the expenditure until the IRS mails a notice of deficiency or assesses the tax, whichever comes first. If the foundation does not correct the problem within that window, a second tax of 100% of the grant amount applies.¹

Foundation managers have personal exposure too. Any manager who knowingly agrees to a taxable expenditure owes a tax of 5% of the grant amount, capped at $10,000 per expenditure. A manager who then refuses to participate in correcting the violation owes an additional 50%, capped at $20,000 per expenditure.¹ The “knowingly” standard offers some protection for managers acting in good faith on reasonable legal advice, and it also means ignoring red flags is a personally expensive mistake.

Records of the eligible population, the applicant pool, the committee’s composition, and the selection rationale for every cycle are the foundation’s primary defense in an audit. Without them, proving compliance with any of these rules becomes very difficult.

What Revenue Procedure 76-47 Does Not Cover

Clearing Revenue Procedure 76-47 keeps the foundation out of Section 4945 trouble. It does not determine whether the scholarship is tax-free to the student. That question runs through Section 117, which excludes from the recipient’s gross income only the portion used for tuition, fees, books, supplies, and equipment required for coursework, and only if the recipient is a degree candidate at an eligible educational institution. Amounts used for room, board, and other living expenses are taxable to the student, as is any portion representing payment for services the student performs as a condition of the award.⁷

1
Office of the Law Revision Counsel. 26 USC 4945 – Taxes on Taxable Expenditures
2
Internal Revenue Service. Advance Approval of Grant-Making Procedures
3
Internal Revenue Service. Instructions for Form 8940
4
eCFR. 26 CFR 53.4945-4 – Grants to Individuals
5
Internal Revenue Service. Revenue Procedure 76-47
6
Office of the Law Revision Counsel. 26 USC 4941 – Taxes on Self-Dealing
7
Office of the Law Revision Counsel. 26 USC 117 – Qualified Scholarships