The IRS has determined (202512004) that a donation to a tax-exempt community foundation, which was many times larger than the foundation's average total donations per year, may be treated as an unusual grant and will not affect the organization's publicly supported status.

Facts

The organization, recognized by the IRS as tax-exempt under Section 501(c)(3) and as a public charity under IRC Sections 509(a)(1) and 170(b)(1)(A)(vi), operates as a community foundation (the Foundation) that accepts donations to build endowments to benefit communities in its state. The Foundation actively solicits and attracts public support from various public sources.

The Foundation received a pledge, to be paid in full before year-end, from a former donor. The donation would be many times larger than the Foundation's average total donations per year. The Foundation will use the donation to support specific projects and initiatives for nonprofits, consistent with the Foundation's charitable purpose, within its home state. The donor's relationship to the Foundation is not described in IRC Section 4946.

While the donor of the proposed grant has contributed to the Foundation in the past, and therefore has knowledge of its charitable purpose, the donor's prior donations were not substantial, making the proposed grant highly unusual and unexpected. The proposed contribution, if not considered an unusual grant, would jeopardize the Foundation's public-support status, as it would drastically decrease the Foundation's public-support percentage to less than one-third of its total support.

Law and analysis

The IRS cited two sections of the treasury regulations, Treas. Reg. Section 1.170A-9(f)(6)(ii) and Treas. Reg. Section 1.509(a)-3(c)(4), as support for its conclusions.

For purposes of applying the 2% limitation for determining whether the one-third-support test is met, Treas. Reg. Section 1.170A-9(f)(6)(ii) allows one or more contributions to be excluded from the numerator and denominator of the applicable public-support calculation.

The exclusion in Treas. Reg. Section 1.170A-9(f)(6)(ii) generally applies to "substantial contributions or bequests from disinterested parties, which contributions or bequests —

1. Are attracted by reason of the publicly supported nature of the organization;
2. Are unusual or unexpected with respect to the amount thereof; and
3. Would, by reason of their size, adversely affect the status of the organization as normally being publicly supported for the applicable period described in [Treas. Reg. Section 1.170A-9(f)(4) paragraph (f)(4)."

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

1. Whether the contribution was made by a person who (a) created the organization, (b) previously contributed a substantial part of its support or endowment, (c) had authority over the organization, (d) directly or indirectly exercised control over the organization, or (e) was in a relationship described in IRC Section 4946(a)(1)(C) through (G) (a contribution made by a person meeting one of these criteria is ordinarily given less favorable consideration than a contribution made by others)
2. Whether the contribution was an inter vivos transfer or a bequest, which will ordinarily be given more favorable consideration than an inter vivos transfer
3. Whether the contribution was made in cash, marketable securities, or assets that further the organization's exempt purpose (e.g. a gift of a painting to a museum)
4. Whether the organization carried on a program of public solicitation and exempt activities and could attract significant public support before receiving the unusual contribution
5. 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, which may be evidence that the organization cannot reasonably expect to attract sufficient public support
6. Whether the organization met the one-third-support test before the year of the contribution without excluding any unusual grants
7. Whether the organization has a representative governing body, as described in Treas. Reg. Section 1.509(a)-3(d)(3)(i)
8. Whether the transferor placed material restrictions or conditions on the contribution under Treas. Reg. Section 1.507-2(a)(7).

The IRS determined that the donation in question meets the criteria of Treas. Reg. Section 1.170A-9(f)(6)(ii) and the facts-and-circumstances test of Treas. Reg. Section 1.170A-9(f)(6)(iii), even though not all of the factors in Treas. Reg. Section 1.509(a)-3(c)(4) are present. Of particular importance to the IRS in reaching this decision were (1) the donor's relationship to the Foundation falling outside the scope of IRC Section 4946, (2) the Foundation's payment of its operating expenses primarily through public support, (3) the Foundation's reasonable expectation to continue attracting significant public support, and (4) the Foundation's satisfaction of the one-third-public support test before the donation without any unusual grant exclusions.

Implications

IRC Section 501(c)(3) public charities that receive an unusually large or uncommon contribution should review Treas. Reg. Section 1.509(a)-3(c)(4) to determine if that grant may be excluded from their public support calculation as an "unusual grant" to limit its impact on their public-charity status under IRC Section 509(a)(2) or IRC Sections 509(a)(1) and 170(b)(1)(A)(vi). Unfavorable factors may include if the grant is received from an organization founder or insider, or if the organization does not regularly solicit public contributions. Conversely, favorable factors suggesting the grant was "unusual" may include if it was given by a donor who is not an organization insider in response to regular solicitations.

Organizations that have historically met the public-support test but find their public support qualification jeopardized by an unusually large or unexpected contribution should consider filing Form 8940 to obtain IRS confirmation that the contribution is unusual and can be excluded from the public-support calculation. Alternatively, the organization could rely on advice from counsel in determining that such a grant is unusual.