One-time cash grant from a dissolving hospital is an "unusual grant" excluded from the public-support test

Plain-English summary

Public charities have to keep getting enough of their money from the general public to stay "publicly supported"; a single huge gift can throw off that math and jeopardize their status. The tax rules let certain large, unexpected gifts be treated as "unusual grants" and left out of the public-support calculation. Here a charity asked the IRS to confirm in advance that a one-time cash grant it would receive qualifies. The grant comes from a hospital (a 501(c)(3) public charity) that is dissolving and selling its assets, and that decided to give the leftover cash to this organization so the money keeps serving the community. The IRS agreed the grant is an unusual grant under Treas. Reg. § 1.170A-9(f)(6)(ii). It weighed the facts: the donor is a public charity that is winding down and will not influence the recipient, the gift is cash furthering exempt purposes, it is one-time with future support expected from the public, the recipient has a representative community board, and the only condition is a net-worth requirement to keep the recipient operating for exempt purposes. Excluding the grant lets the organization keep its publicly supported status.

Ruling snapshot

• Question: Does a one-time cash grant to a public charity from a dissolving hospital qualify as an "unusual grant" that is excluded from the public-support fraction?
• Outcome: Approved (grant recognized as an unusual grant).
• Key authorities: Treas. Reg. §§ 1.170A-9(f)(6)(ii), 1.509(a)-3(c)(4); IRC §§ 509, 170(b)(1)(A)(iii), 4946.

Full text (IRS public release)

                              Department of the Treasury          Date:
                              Internal Revenue Service            12/05/2022
                              Tax Exempt and Government Entities  Employer ID number:
IRS  P.O. Box 2508
     Cincinnati, OH 45201

                                                                 Person to contact:

Release Number: 202309021
Release Date: 3/3/2023

LEGEND                                                           UIL: 509.02-01
B = Date

C = State

d dollars = $

E = Medical Center

Dear

We have considered your written 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 concluded that the proposed grant constitutes an unusual grant under
Treas. Reg. Section 1.170A-9(f)(6)(ii) and related provisions of the regulations. The basis for our conclusion
is discussed below.

Facts:

You requested advance approval from the Internal Revenue Service that a potential grant or contribution of d
dollars constitutes an unusual grant. The contribution is from E, an organization exempt under IRC Section 501
(c)(3) and classified as a hospital under Section 170(b)(1)(A)(iii). E is in the process of dissolving and has
agreed to sell its assets to a third-party purchaser. E's board of directors agreed to distribute the funds in cash
entirely to you in a one-time grant so that the use of funds continues to serve the community. Some of the
board of directors of E will also serve as your board members. You have a representative governing body and
No one person exercises control over you. There are no material restrictions on the grant other than you must
keep a certain net worth for years from the closing of the sale to ensure that you are operated for exempt
purposes.

Law:
Two sections of the Treasury Regulations set forth the criteria for an unusual grant. They are:

Treasury Regulation Section 1.170A-9(f)(6)(ii)
This section states that, for purposes of applying the 2% limitation to determine whether the 33 1/3% of-support
test is satisfied or the 10 % support limitation is met, 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

Letter 4787 (Rev. 11-2021)
Catalog Number 58230Y


* 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)
This section 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 Internal Revenue Code (IRC) Section 4946(b);

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

e. was in a relationship described in IRC 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 bullets a through 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 Treas. Reg. Section 1.509(a)-3(a)(2) without the benefit of any
exclusions of unusual grants pursuant to Treas. Reg. Section 1.509-3(c)(3);

¢ Whether the organization has a representative governing body as described in in Treas. Reg. Section
1.509(a)-3(d)(3)(i); and

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

Application of Law:

The exclusion of unusual grants is generally intended to apply to substantial contributions from disinterested
parties (i.e., unusual, unexpected, attracted by the publicly supported nature of the organization) which implies
that there are cases where the contribution is part of a prearranged plan but may still qualify as an unusual grant.

You have a one-time transfer from a dissolving organization that would adversely affect your public support
status.

The underlying facts and circumstances considered include:

a. The grant is being made by an organization that qualifies under IRC Section 170(b)(1)(A)(iii), rather than an
individual, business or private foundation.

Letter 4787 (Rev. 11-2021)
Catalog Number 58230Y


b. The hospital is dissolving and will no longer be in a position to exercise influence.

c. The contribution is being made in cash to further your exempt purposes.

d. This is a one-time grant and you will be expected to rely on the general public for future support.

e. You have a representative governing board composed of community leaders.

f. There are no material restrictions on the grant other than the condition that you must keep a certain net worth
for years from the date of sale to ensure you are operating for exempt purposes rather than for the benefit of
the transferor.

Therefore, the transfer from E to you is characterized as an unusual grant within the meaning of Treas. Reg.

Sec. 1.170A-9(f)(6)(ii).

We'll make this determination letter available for public inspection after deleting personally identifiable information,
as required by IRC Section 6110. We've enclosed Letter 437, Notice of Intention to Disclose - Rulings, and a
copy of the letter that shows our proposed deletions.

¢ If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us.

* If you agree with our deletions, you don't need to take any further action.

We've sent a copy of this letter to your representative as indicated in your power of attorney.
If you have questions, please contact the person listed at the top of this letter.

Sincerely,

Director, Exempt Organizations
Rulings and Agreements

Letter 4787 (Rev. 11-2021)
Catalog Number 58230Y