In a recently published private letter ruling (PLR 202245012), the IRS determined that a proposed grant to a public charity will qualify as an "unusual grant" under Treas. Reg. Section 1.170A-9(f)(6)(ii) and therefore will not adversely affect the charity's status as normally being publicly supported.

Facts

The public charity at issue, exempt from tax as an organization described in IRC Sections 501(c)(3), 509(a)(1) and 170(b)(1)(A)(vi), anticipated receiving a grant from a related private foundation (B). The grant itself would be the unconditional gift of a percentage interest in a related for-profit entity (C) that holds only one asset — a lease agreement with a construction-use contract on a facility where the public charity will carry out its exempt activities.

The public charity has a history of soliciting and receiving public support for its exempt activities and has consistently satisfied the one-third support test in Treas. Reg. Section 1.509(a)-3(a)(2) without excluding any "unusual grants" from the calculation. The public charity continues to solicit public support and reasonably expects to continue doing so.

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 public charities, or by other donors who contribute less than 2% of the nonprofit's overall receipts over that five years
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 indicating that 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 in determining 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 (more favorable) or an inter vivos transfer (less 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 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 would meet the "unusual grant" requirements, and therefore was excludible from the numerator and denominator of the organization's public-support calculation, because: (1) the amount of the grant was unusual; (2) factoring the grant into the public-support test for the charity would adversely affect its "status as normally being publicly supported"; (3) the grantor had not previously contributed a substantial part of the organization's support; (4) the granted assets can be used to further the organization's exempt purposes; (5) the organization had carried on a program to solicit grants from the public and received a significant amount of public support; (6) the organization expects to attract a significant public support after the unusual grant; (7) the organization had not previously excluded any other unusual grants from its public-support calculation; (8) the organization had a representative governing body; and (9) the grantor did not impose any material conditions or restrictions on the organization's use of the grant.

Implications

PLR 202245012 underscores that public charities should closely monitor their contributions and determine if any unexpected grant qualifies to be excluded from the public-support calculation as an unusual grant. Although this exclusion is generally intended to apply to substantial, unexpected contributions from disinterested parties, the IRS determined in this ruling that a grant from a related private foundation was, in fact, unusual. The IRS reached that conclusion based on other favorable facts, particularly the unusual amount of the grant, the organization's ongoing grant solicitation program, its historical receipt of significant public support and expectation of continuing to receive significant public support, and the adverse effect that inclusion of the grant would have on the organization's ability to meet the public-support test. These have been determining factors in prior IRS unusual grant rulings.

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 the unusual grant rules described in 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.

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Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor