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One of the factors that must be considered when setting up a scholarship fund is making certain that scholarship program is compliant with IRS regulations. The IRS rules about foundation-based scholarship funds are designed to make sure that the procedure for awarding scholarships is not discriminatory and that a broad class of individuals have the potential to benefit from the award.
IRS guidelines prohibit companies from setting up scholarship funds to pay tuition fees for promising students they wish to support through training for the purpose of recruiting them. The IRS also prohibits companies from utilizing a foundation-based scholarship to cover employee tuition reimbursement expenses. Corporations are free to engage in such acts, but may not use foundation funds to do so.
Corporations may use foundation-based scholarship funds for scholarships made available to the children of employees under specific guidelines established by the IRS. Employee dependent scholarships cannot be designed to benefit the corporation in any way. The scholarship must be given for the sole purpose of benefiting the students. The scholarship selection committee has to be completely independent of the company. Further, if the employee leaves the company, the scholarship cannot be taken away from the child.
Individuals who wish to set up scholarship funds may do so via a private foundation or a community foundation. The IRS does not have a preference in this case, and individuals typically choose one form or the other based on the tax implications for their specific situation.