November 18, 2021
IRS rules large, unanticipated grant to public charity won't adversely affect public support requirements
In a private letter ruling (PLR 202144032), the IRS has ruled that a large grant that a tax-exempt public charity anticipates receiving constitutes an unusual grant under Treas. Reg. Sections 1.170A-9(f)(6)(ii) and 1.509(a)-3(c)(4), and therefore will not adversely affect the charity's public support requirements.
The IRC Section 501(c)(3) tax-exempt organization requesting the ruling is currently classified as a public charity under IRC Section 509(a)(2). The organization actively solicits public contributions through seminars, websites and word of mouth, and has received some small grants in the past. The organization will receive an unexpected grant that significantly exceeds its annual budget. As a condition of receiving the grant, the organization must use the grant for printing and promoting certain religious publications in accordance with the organization's bylaws.
A tax-exempt organization may qualify as a public charity if it meets one of two public support tests:
If a public charity is unable to pass one of those two public support tests, it will no longer qualify as a public charity, and would be reclassified as a private foundation. Treas. Reg. Sections 1.170A-9(f)(6)(ii) and 1.509(a)-3(c)(4) allow a public charity to exclude any qualifying unusual grants from both the numerator and denominator of its public support calculation.
Treas. Reg. Section 1.170A-9(f)(6)(ii) provides that substantial contributions or bequests from disinterested parties qualify as unusual grants, and therefore may be excluded from the public support calculation if they:
Treas. Reg. Section 1.509(a)-3(c)(4), which applies this unusual grant exception to public charities described in IRC Section 509(a)(2), requires pertinent facts and circumstances to be taken into consideration to determine whether a contribution is excludable from the public support calculation; no single factor, however, will necessarily be determinative. Factors to be considered include whether:
The IRS concluded that the grant meets the requirements of Treas. Reg. Section 1.170A-9(f)(6)(ii) because a disinterested party is making the grant and:
Further, the IRS concluded that the grant met the requirements of Treas. Reg. Section 1.509(a)-3(c)(4) as an "unusual grant," based on these facts and circumstances:
PLR 202144032 serves as a timely reminder that public charities should closely monitor their incoming contributions and determine if any unexpected grant qualifies to be excluded as an unusual grant. If an organization is not certain whether a grant can be excluded as an unusual grant, it may file a Form 8940, Request for Miscellaneous Determination, to request an IRS determination that the grant is an unusual grant.
For tax-exempt status and public support purposes, grant makers and grantees should become familiar with Treas. Reg. Sections 1.170A-9(f)(6)(ii) and 1.509(a)-3(c)(4). For more information, see Publication 557 (Rev. February 2021) or contact your EY representative.