24 October 2024

Grant from joint venture affiliate may be treated as unusual and won't affect organization's status as publicly supported

The IRS has determined (Ruling 202440013) that a grant provided by an unrelated, disinterested party to a tax-exempt entity organized for the purposes of providing affordable housing and community education and economic improvement training may be treated as an unusual grant and will not affect the exempt organization's publicly supported status.

Facts

The exempt organization, recognized by the IRS as a tax-exempt public charity under IRC Section 509(a)(2), was formed to own and maintain public access to parkland and for maintaining community-based programs for education and improvement to residents of B, one of the largest affordable housing projects in the community. The organization's mission was to provide programs for the benefit of B's residents and the surrounding areas, collectively known as D.

Several years ago, B was sold to a joint venture, after which the exempt organization formed a new board to better represent the community and provide additional services, such as youth development and support services and a program focused on creating pathways for economic opportunity. E, an affiliate of the joint venture, was required to invest a particular amount in D as a result of a refinancing. E determined the most efficient use of its funds would be to make grants to the exempt organization.

Neither E, nor any of its members, managers or officers have created or established any endowment on the exempt organization's behalf and was not affiliated with the exempt organization. The exempt organization had also consistently attracted sufficient public support to meet the 33-1/3% test under IRC Section 509(a)(2) without the benefit of any exclusions of unusual grants under Treas. Reg. Section 1.509-3(c)(3). Because the grant from E substantially exceeded other funding the exempt organization received, its status as a publicly supported organization would have been jeopardized.

Law and Analysis

For purposes of applying the 2% limitation for determining whether the 33-1/3% of support test is met, Treas. Reg. Sections 1.509(a)-3(c)(3) and 1.170A-9(f)(6)(ii) allow the exclusion of one or more contributions from the numerator and denominator of the applicable public support calculation. The exclusion generally applies to substantial contributions or bequests from a disinterested party that (1) are attracted by reason of the publicly supported nature of the organization, (2) are unusual or unexpected with respect to the amount, and (3) would adversely affect the publicly supported status of the organization by nature of the contribution's size.

When determining whether a particular contribution may be excluded from the public support calculation, Treas. Reg. Section 1.509(a)-3(c)(4) requires that all pertinent facts and circumstances be taken into account. While no single factor is determinative, such factors may include:

  • Whether the contribution was made by a person who (1) created the organization, (2) previously contributed a substantial part of its support or endowment, (3) stood in a position of authority with respect to the organization, (4) directly or indirectly exercised control over the organization, or (5) was in a relationship described in IRC Section 4946(a)(1)(C) through (G)
  • The form of the contribution (i.e., cash, marketable securities, or assets that further the exempt purpose of the organization)
  • Whether, except in the case of a new organization, before receipt of the particular contribution the organization carried on a program of public solicitation and exempt activities and was able to attract a significant amount of public support
  • Whether the organization can reasonably expect to attract significant public support after the contribution or if it must rely on continued unusual grants to meet operating expenses
  • Whether before the year of the contribution the organization had met the one-third support test without the benefit of any unusual grant exclusion
  • Whether the organization has a representative governing body as described in Treas. Reg. Section 1.509(a)-3(d)(3)(i)
  • Whether the transferor placed material restrictions or conditions on the contribution within the meaning of Treas. Reg. Section 1.507-2(a)(7)

According to the IRS, the grant in question met the requirements of Treas. Reg. Sections 1.509(a)-3(c)(3) and 1.170A-9(f)(6)(ii) because it was from a disinterested party and was unusual or unexpected with respect to the amount and would have adversely affected the exempt organization's publicly supported status by reason of the amount.

The IRS further determined the grant met the requirements of Treas. Reg. Section 1.509(a)-3(c)(4) based on the fact (1) it was not made by the person who created the organization, (2) E had not previously contributed a substantial portion of the endowment or stood in a position of authority to the exempt organization, and (3) E did not exercise direct or indirect control over the exempt organization. Additional factors weighing in favor of unusual grant status included that (1) the cash would further the exempt organization's exempt purpose, (2) the organization would continue to solicit public funds for support after the transfer and (3) no material restrictions were imposed by the donor.

Implications

The ruling serves as a reminder for publicly supported IRC Section 501(c)(3) organizations to routinely monitor their public support percentage. Even if an organization typically meets the 33-1/3% threshold, the size of certain grants could adversely impact its publicly supported status. Organizations should review large grants to determine whether they qualify as "unusual," to avoid any adverse impact on the public support calculation. If a grant potentially qualifies as unusual and for exclusion from the public support calculation, an organization may (but is not required to) request an IRS unusual grant ruling by submitting Form 8940, Request for Miscellaneous Determination.

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Contact Information

For additional information concerning this Alert, please contact:

Exempt Organization Tax Services

Published by NTD’s Tax Technical Knowledge Services group; Chris DeZinno, legal editor

Document ID: 2024-1957