Tax News Update    Email this document    Print this document  

In a recently published private letter ruling (PLR 202235013), the IRS ruled that a publicly supported organization would continue to qualify as publicly supported, despite being named the beneficiary of a trust, because the grant received from the trust qualified as an "unusual grant" and therefore may be excluded from the organization's public-support calculation.

Facts

The publicly supported organization was named as a beneficiary of a trust to which it had no relationship or prior connection. The trust chose the organization as a beneficiary based on its reputation as a public charity and distributed the funds at issue in yearly disbursements over a certain period. The organization would use the funds received from the trust for certain "study, analysis and/or management," presumably in furtherance of its exempt purposes.

Law

A tax-exempt organization may qualify as a public charity under IRC Sections 509(a)(1) and 170(b)(1)(A)(vi) if it meets one of two public-support tests:

1. The 33-1⁄3% support test, which requires at least one-third of the organization's support over five years to be "public support" given by donors who give less than 2% of the nonprofit's overall receipts over that five-year period
2. The 10% facts-and-circumstances test, which requires (a) at least 10% of the charity's total support over five years to be "public support" and (b) certain facts and circumstances that indicate the organization represents the broad interests of, and benefits, the general public

A public charity that is unable to pass one of those two public-support tests would no longer qualify as a public charity and thus 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 satisfy these requirements:

• Were given based on the publicly supported nature of the organization
• Are for an unusual or unexpected amount
• Would, because of their size, adversely affect the organization's publicly supported status

Treas. Reg. Section 1.509(a)-3(c)(4) 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 is necessarily determinative. Factors to be considered include whether:

• The contribution was made by a person who: (1) created the organization; (2) has contributed a substantial part of the organization's support or endowment; (3) was in a position of authority in the organization; or (4) exercised direct or indirect control over the organization
• 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 1.507-2(a)(7) on the transferee in connection with the transfer

Ruling

Based on the facts presented, the IRS determined that the grant met the "unusual grant" requirements because: (1) the donor was a disinterested party that was making the grant due to the publicly supported nature of the beneficiary; (2) the amount of the grant was unusual or unexpected; and (3) inclusion of the grant in the charity's public-support calculation would affect the beneficiary's status as normally being publicly supported.

Implications

PLR 202235013 serves as a timely reminder that public charities should closely monitor their incoming contributions and determine if any unexpected grant qualifies to be excluded from the public support calculation 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. January 2022) or contact your EY representative.

———————————————

RELATED RESOURCES

— For more information about EY's Tax-Exempt Organization Services group, visit us here.

———————————————