202034008: An unexpected cash grant for scholarships qualifies as an "unusual grant," protecting a school-support charity's public status

Plain-English summary

A 501(c)(3) nonprofit that supports a school by funding scholarships and special-needs projects received an unusually large cash grant from an unrelated entity. The grant was much bigger than the donations the charity normally gets, which could have knocked it out of public-charity status by distorting the one-third public-support test. The charity asked the IRS to treat the grant as an "unusual grant" so it can be dropped from both sides of the support fraction. The IRS agreed: the grantor did not create or control the charity, shares no board members with it, and the money came as cash to fund scholarships. Because the grant satisfies Treas. Reg. §§ 1.170A-9(f)(6)(ii) and 1.509(a)-3(c)(4), it is excluded from the support test and the charity keeps its public-charity classification.

Ruling snapshot

• Question: Does an unexpected large cash grant from an unrelated entity qualify as an "unusual grant" excludable from the public-support test?
• Outcome: Approved (grant characterized as an unusual grant)
• Key authorities: Treas. Reg. §§ 1.170A-9(f)(6)(ii), 1.509(a)-3(c)(4); IRC §§ 509(a)(1), 170(b)(1)(A)(vi), 501(c)(3)

Full text (IRS public release)

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

Number: 202034008
Release Date: 8/21/2020

Date: May 26, 2020
Employer Identification Number:

Person to Contact - ID#:

Contact Telephone Numbers:

LEGEND: UIL: 509.02-01
B = state
C = year
D = school
E = entity
x dollars = amount

Dear

We have considered your July 24, 2019 request for recognition of an unusual grant under
Treasury Regulations 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 a nonprofit corporation exempt from taxation
under Section 501(c)(3) of the Internal Revenue Code and classified as a public charity under
Sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code. Your purpose is to support the operations
of D by funding scholarships and special needs projects.

You are asking for approval of an unusual grant in the amount of x dollars. The grant will come
from E in the form of cash. The grant was not expected and is unusual when compared to the
size of donations you normally receive. The funds are to be used to provide scholarships.

E is not one of your creators nor does E stand in a position of authority over you. In addition,
you have a large board of directors and do not share any board members with E.

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

Treas. Regs. 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:

Letter 4787 (2-2012)
Catalog Number 58230Y

• 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.

Treas. Reg. 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 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 Regulations Section 1.509(a)-3(d)(3)(i); and

Letter 4787 (2-2012)
Catalog Number 58230Y

• Whether material restrictions or conditions within the meaning of Treasury
  Regulations 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 Treas. Reg. Section 1.170A-9(f)(6)(ii) because

the grant is from a disinterested party, and:

• The grant was attracted because you are publicly supported,
• The grant was unusual or unexpected with respect to the amount and size, and
• The grant will adversely affect your status as normally being publicly supported.

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

a) The grant was not made by a person who created or contributed a substantial
amount of funds to you. The grantor does not stand in a position of authority or
exercise control over you.

b) The grant is in the form of cash.

c) 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.

d) You have met the public support test in past years.

e) It can be assumed you will be able to maintain a level of public support in the future.

f) You have a large representative governing body.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4787 (2-2012)
Catalog Number 58230Y