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.

Facts

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.

Law

A tax-exempt organization may qualify as a public charity if it meets one of two public support tests:

1. The 33-1/3% public support test requires at least one-third of the organization's support over a five-year period to be "public support" that includes contributions from other public charities and contributions by other donors up to 2% of the charity's overall support during that five-year period
2. The 10% facts-and-circumstances test requires (1) at least 10% of the charity's total support over the five-year measuring period to be "public support" and (2) the facts and circumstances to indicate it is a public charity

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:

1. Are attracted by the publicly supported nature of the organization
2. Are for an unusual or unexpected amount
3. Would, because of their size, adversely affect the organization's publicly supported status

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 contribution was made by a person who: created the organization; has contributed a substantial part of the organization's support or endowment; was in a position of authority in the organization (e.g., foundation manager); exercised direct or indirect control over the organization; or was in a relationship described in IRC Section 4946(a)(1)(C) through (G) with one of the people described in this sentence
• The contribution was a bequest (less favorable) or an inter vivos transfer (more favorable)
• The contribution was for cash, readily marketable securities or assets that further the organization's tax-exempt purpose
• The organization had solicited and attracted a significant amount of public support and had carried on tax-exempt activities before receiving the contribution
• The organization is reasonably expected to attract significant public support after receiving the contribution at issue
• The organization met the one-third public support test before receiving the contribution
• The organization has a representative governing body, described in Treas. Reg. Section 1.509(a)-3(d)(3)(i)
• The transferor has imposed material restrictions or conditions described in Treas. Reg. Section 1.5072(a)(7) on the transferee in connection with the transfer

IRS analysis

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:

• The organization's publicly supported nature attracted the grant
• The grant is unusually or unexpectedly large in amount
• The grant would otherwise adversely affect the organization's publicly supported status

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:

• The grantor is a disinterested party that did not create the organization, had not previously contributed substantial support to the organization, and is not in a position of authority with respect to the organization.
• The organization has carried on a public solicitation program and tax-exempt activities and has received significant public support.
• The organization expects to attract significant public support after receiving the grant.
• The transferor has not imposed material restrictions or conditions on the organization in connection with the transfer.

Implications

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.

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