Public charities under U.S. tax law are divided into several categories. The most common are charitable entities that are "publicly supported." A charitable organization is publicly supported under U.S. tax law if it receives a substantial portion of its income either from other public charities and the government or from a diverse combination of sources, including individual donors and grantmakers.
As discussed in our last post, a publicly supported charity's receipt of a single large grant can cause the organization to lose its public charity status and convert to a private foundation. This is commonly called "tipping" into private foundation status. This conversion could potentially be avoided if the organization was the recipient of a material and unexpected contribution that qualifies as an "unusual grant" under U.S. Treasury Regulations Section 1.509(a)-3(c)(3).
What Is an Unusual Grant?
An unusual grant is a substantial and material contribution or bequest from a disinterested party that meets a combination of factors set forth in the treasury regulations. If a contribution or bequest qualifies as an unusual grant, it can be excluded from both the numerator and the denominator of the public support calculation and thereby prevent the organization's public support from dipping below the required threshold. The unusual grant exception applies to contributions or bequests from disinterested parties, where such contributions or bequests satisfy all three of the following criteria.
- They are attracted by reason of the publicly supported nature of the organization;
- They are unusual or unexpected with respect to the amount thereof; and
- They would, by reason of their size, adversely affect the status of the organization as normally being publicly supported.
Unusual Grant Factors
No single factor is determinative in evaluating whether a particular contribution qualifies as an unusual grant. Instead, all pertinent facts and circumstances are taken into consideration. Factors considered include
- The relationship of the contributor to the organization. Persons other than those who created the organization, previously contributed a substantial part of its support or endowment, or stood in a position of authority, such as a foundation manager, will ordinarily be given more favorable consideration.
- 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 that further the exempt purposes of the organization, such as the gift of a painting to a museum.
- Whether, prior to the receipt of the contribution, the organization carried on an actual program of public solicitation and exempt activities and was able to attract a significant amount of public support — except in the case of a new organization.
- Whether the organization may reasonably be expected to attract a significant amount of public support subsequent to the contribution.
- Whether, prior to the year in which the contribution was received, the organization met the public support test without the benefit of any unusual grant exclusions.
- Whether the contributor, or any "disqualified person" in relation to the contributor — such as a family member, controlled entity, or a substantial contributor to the contributor — directly or indirectly exercises control over the organization.
- Whether the organization has a representative governing body.
- Whether material restrictions or conditions have been imposed in connection with the contribution.
Examples of Unusual Grants
In some cases, all circumstances point to an unusual grant. In a recent private letter ruling, the IRS held that a contribution to a public charity for the purposes of expanding and enhancing two existing programs and establishing a new program was an unusual grant. The contribution qualified because, among other factors
- The donor was drawn to the charity by virtue of its public fundraising efforts.
- The donor did not exercise any control or influence over the charity.
- The donor had not previously contributed to the charity.
- The donor placed few conditions on the contribution.
- The charity had a representative governing body.
- The charity had previously met the public support test.
- The charity would continue to generate ongoing support through its existing fundraising activities.
See Ltr. Rul. 201621015.
In other cases, a grant may qualify as unusual without meeting all possible factors. For example, the treasury regulations illustrate a hypothetical in which a grant from an individual who was not disinterested still qualified as unusual. In the hypothetical, a private foundation founded by an individual, who was also a founder and board member of a newly established charity, made a substantial cash grant to the new charity for its initial capital expenses.
The regulations explain that, even though the individual is one of nine members of the charity's governing body, was one of its original founders, "and continues to lend his prestige to [the charity]'s activities and fund raising efforts, [he] does not, directly or indirectly, exercise any control over [the charity]." The hypothetical notes that the charity "also receives a significant amount of support from a number of smaller contributions and pledges from other members of the general public." Treasury Regulations Section 1.509(a)-3(c)(6), Example 4.
The hypothetical demonstrates that a contribution may still qualify as unusual even if it comes from an individual directly involved in the recipient's operations, as long as it meets a sufficient number of other relevant factors.
Unusual Grants and Equivalency Determinations
The unusual grant exception applies equally to U.S. public charities and to non-U.S. organizations seeking equivalency determinations (EDs). In preparing an ED, NGOsource requests specific, additional information from organizations that might have received large and unexpected grants that negatively affect their public support. Where possible, excluding an unusual grant can be the dispositive factor in an organization's qualification as equivalent to a public charity. For this reason, grantmakers and grantees benefit from a familiarity with the applicable rules.
For more on unusual grants, we recommend the following resources.
- Public Support Tests — Unusual Grants, by NEO Law Group
- IRS Letter Ruling 201342011: Bequest by Founder of Organization Constitutes an "Unusual Grant" That Doesn't "Tip" Organization Out of Compliance With Public Support Requirements, by Richard L. Fox, Planned Giving Design Center
This article is for general informational purposes only and does not represent legal advice as to any particular set of facts. Please seek legal counsel as you deem necessary.