Assets absorbed in a merger qualify as an "unusual grant," protecting public-charity status

Plain-English summary

A public charity keeps its "publicly supported" status only if it passes a math test: enough of its money must come from the general public rather than from a few large donors. A single huge gift can blow that test. To prevent that, the regulations let a charity exclude a one-time "unusual grant" from the calculation if the gift was attracted by the charity's public nature, was unexpectedly large, and would otherwise wreck its public-support ratio. Here the charity was set to absorb, through a merger, all the assets (cash, marketable securities, venture capital, and private equity) of another organization that it had controlled as sole member and that would cease to exist after the merger. The charity asked the IRS to treat this incoming transfer as an unusual grant so it would not lose its public-charity classification under sections 509(a)(1) and 170(b)(1)(A)(vi). Weighing the facts and circumstances, the IRS agreed: the transferor did not control the charity, prior gifts from it had been minor, the charity had a genuine public-solicitation program and a broad governing board, the transfer was a one-time terminating distribution with no strings attached, and the charity had consistently met the public support test. So the merger assets are excluded from the support fraction and the charity's public status is preserved. This shows how nonprofits can merge in a large affiliate's assets without accidentally converting themselves into private foundations.

Ruling snapshot

• Question: Does a large one-time asset transfer received through a merger qualify as an "unusual grant" that is excluded from the public support test?
• Outcome: approved (transfer characterized as an unusual grant; public-charity status preserved)
• Key authorities: Treas. Reg. §§ 1.170A-9(f)(6)(ii), 1.509(a)-3(c)(4), 1.507-2(a)(7); IRC §§ 509(a)(1), 170(b)(1)(A)(vi), 4946

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR. Obvious scan misreads were corrected (OCR bullet markers "e" restored to bullets; "substantial contribution:" to "substantial contributions"); wording is otherwise verbatim, and redacted identifiers appear as the IRS released them.

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Number: 201909015
Release Date: 3/1/2019 Employer Identification Number:

Person to Contact - ID#:

Date: December 4, 2018
Contact Telephone Number:

LEGEND: UIL: 509.02-01
B = State
C = Year

D = Organization
x dollars = Amount

Dear

We have considered your May 11, 2018 request for recognition of an unusual grant under
Treasury Regulation Section 1.170A-9(f)(6)(ii) and related provisions.

Based on the information provided, we have concluded that the proposed grant constitutes an
unusual grant under Section 1.170A-9(f)(6)(ii) and related provisions of the regulations. The
basis for our conclusion is set forth below.

Facts:

You were formed in the State of B in C. You are classified as a public charity under Sections
509(a)(1) and 170(b)(1)(A)(vi). You support programs in the areas of aging, child and family
development, education, health, etc. Your staff operates your direct charitable programming and
your grant-making to other non-profit organizations. You have a continuous program to solicit
contributions from the general public. You assert that you have consistently met the public
support test. Your board of trustees are leaders of the community and are from the general
public.

You are asking for advance approval of an unusual grant in the amount of x dollars. The grant
will come from D in the form of cash, marketable securities, venture capital, and private equity
investments. The transfer is the result of a merger between you and D. You will be the surviving
organization. The grant is unusual because D will cease to exist after the merger. As part of the
merger, D will not impose any restrictions or conditions on you or on the use of the funds being
transferred.

Until the merger, you were a supported organization of D. You were not controlled by D, but you
exercised control over D as their sole member. As a supporting organization, D made

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contributions to you over the years. The past contributions were much smaller compared to this
one-time transfer as a result of the merger.

Law:
Treasury Regulation Sections 1.170A-9(f)(6)(ii) and 1.509(a)-3(c)(4) set forth the criteria for an
unusual grant.

Treasury Regulation Section 1.170A-9(f)(6)(ii) states that, for purposes of applying the 2-percent
limitation to determine whether the 33 1/3 percent-of-support test is satisfied, one or more
contributions may be excluded from both the numerator and the denominator of the applicable
percent-of-support fraction. The exclusion is generally intended to apply to substantial contributions
or bequests from disinterested parties which:

• are attracted by reason of the publicly supported nature of the organization;
• are unusual or unexpected with respect to the amount thereof; and

• would, by reason of their size, adversely affect the status of the organization as
normally being publicly supported.

Treasury Regulation Section 1.509(a)-3(c)(4) states that all pertinent facts and circumstances
will be taken into consideration to determine whether a particular contribution may be excluded.
No single factor will necessarily be determinative. Such factors may include:

• 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. stood in a position of authority with respect to the organization, such as a
foundation manager within the meaning of Section 4946(b)

d. directly or indirectly exercised control over the organization, or

e. was in a relationship described in Internal Revenue Code Section 4946(a)(1)(C)
through 4946(a)(1) (G) with someone listed in bullets a, b, c, or d above.

A contribution made by a person described in a. - e. is ordinarily
given less favorable consideration than a contribution made by
others not described above.

• Whether the contribution was a bequest or an inter vivos transfer. A bequest will
ordinarily be given more favorable consideration than an inter vivos transfer.

• Whether the contribution was in the form of cash, readily marketable securities, or
assets which further the exempt purposes of the organization, such as a gift of a
painting to a museum.

• Whether (except in the case of a new organization) prior to the receipt of the particular
contribution, the organization (a) has carried on an actual program of public solicitation

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and exempt activities and (b) has been able to attract a significant amount of public
support.

• Whether the organization may reasonably be expected to attract a significant amount
of public support after the particular contribution. Continued reliance on unusual grants
to fund an organization's current operating expenses (as opposed to providing new
endowment funds) may be evidence that the organization cannot reasonably be
expected to attract future public support.

• Whether, prior to the year in which the particular contribution was received, the
organization met the one-third support test described in Section 1.509(a)-3(a)(2)
without the benefit of any exclusions of unusual grants pursuant to Section 1.509-
3(c)(3);

• Whether the organization has a representative governing body as described in
Treasury Regulation Section 1.509(a)-3(d)(3)(i); and

• Whether material restrictions or conditions within the meaning of Treasury Regulation
Section 1.507-2(a)(7) have been imposed by the transferor upon the transferee in
connection with such transfer.

Application of Law:

The grant meets the requirements of Treasury Regulation Section 1.170A-9(f)(6)(ii). The size
and method of contribution is unusual compared to your typical level of support. The grant will
adversely affect your status as normally being publicly supported.

The grant meets the requirements of Treasury Regulation Section 1.509(a)-3(c)(4) based on the
following facts and circumstances:

The grantor does not stand in a position of authority with respect to you and does not
exercise control over you

Prior contributions from D as a supporting organization were not a substantial part of your
support and you have previously been able to meet the public support test including the
contributions from D

The transfer from D is a terminating distribution because of their merger with you and is a
one-time occurrence

You have carried on an actual program of public solicitation, have exempt activities, and
have attracted a significant amount of public support over the years

The transfer of assets consists of cash and other investments
You have met the public support test in past years

Because you have relied on public support in the past, it can be assumed that you will be
able to maintain that level of public support in the future, and

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• You have a large representative governing body.
In addition, no material restrictions or conditions within the meaning of Treasury Regulation
Section 1.507-2(a)(7) have been imposed by the transferor upon the transferee in connection
with such transfer.

For all of the forgoing reasons, the grant should be characterized as an unusual grant within the
meaning of Treasury Regulation Section 1.509(a)-3(c)(4).

We have sent a copy of this letter to your representative as indicated in your power of attorney.

If you have any questions, please contact the person listed in the heading of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4787 (2-2012)
Catalog Number 58230Y