February 10, 2023
One-time cash grant from dissolving tax-exempt hospital to public charity constitutes an 'unusual grant'
In a private letter ruling (PLR 202305020), the IRS has ruled a one-time cash grant that a tax-exempt public charity (the Taxpayer) anticipates receiving from a dissolving tax-exempt hospital will constitute an "unusual grant" and therefore will be excludible from the Taxpayer's public support calculation for purposes of determining whether the Taxpayer meets the public support test.
Prior to dissolution, the donor organization had been recognized as tax-exempt under IRC Section 501(c)(3) and classified as a hospital under IRC Section 170(b)(1)(A)(iii). The hospital's board of directors agreed to sell the hospital's assets to a third party and distribute a one-time cash grant to the Taxpayer, a publicly supported organization under IRC Sections 509(a)(1) and 170(b)(1)(A)(vi), enabling the funds to be used to continue serving the community. Some of the hospital's board members would serve on the Taxpayer's board. The only material restriction on the grant would require the Taxpayer to maintain a certain net worth for six years following the hospital's sale to ensure that the Taxpayer continues to be operated for tax-exempt purposes.
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:
A public charity that is unable to pass one of these 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, thereby preventing the unusual grant from decreasing its public support percentage.
Treas. Reg. Section 1.170A-9(f)(6)(ii) allows a publicly supported organization to treat a grant as an unusual grant if it satisfies all of the following requirements:
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 excludible from a public charity's public support calculation; no single factor is necessarily determinative. Factors to be considered include whether:
The PLR lists facts and circumstances that the IRS considered in its analysis:
Based on these facts, the IRS concluded that the transfer would be considered an unusual grant under Treas. Reg. Section 1.170A-9(f)(6)(ii).
Recognizing and classifying a grant as unusual and excluding it from the public support calculation is a beneficial tool when tax-exempt organizations are close to failing either the 33-1/3% or the 10% facts-and-circumstances public support test. PLR 202305020 underscores the need for publicly supported charities, particularly those that don't meet (or narrowly meet) the 33-1/3% public support test, to closely monitor the grants they receive and determine if any would qualify as an unusual grant. A public charity may — but is not required to — request an IRS determination of whether a grant is an unusual grant by submitting Form 8940, Request for Miscellaneous Determination. If the response to the miscellaneous determination request is not received prior to filing, the tax-exempt organization may still be able to take a reasonable position that the grant qualifies as unusual, though there would be a risk that the IRS disagrees with the position.
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor