Grant to Public Charity Qualifies as “Unusual Grant” for Public Support Test

Publicly supported charities provide favorable benefits under the Code for both the organization and donors, in contrast with non-publicly supported private foundations. To qualify, the organization must receive a substantial part of its support from either governmental bodies or from direct or indirect contributions from the public. The regulations provide tests for public support (the 1/3-of-support test and the 10% facts and circumstances test (Treas. Regs. §1.170A-9(f)). Under these tests, large grants from any individual (namely, grants exceeding 2% of the organization’s total support), can make it difficult to pass these tests. However, if a greater than 2% grant qualifies as an “unusual grant” under Treas. Regs. §1.170a-9(f)(6)(i), they are disregarded under the tests.

A recent private letter ruling determined that a large grant at the time a new organization had begun operations qualified as an unusual grant. The contributor was a foundation that was informed about the organization through a mutual acquaintance, and had no prior affiliation with the organization. The following facts and circumstances are the types of things the IRS likes to see in testing for an unusual grant, and were present here:

The contributor did not create the recipient organization;

The contributor has not previously contributed to the recipient organization;

The contributor does not stand in a position of authority with respect to the recipient organization;

The contributor does not directly or indirectly exercise control over the recipient organization;

The contributor was not in a relationship described in Code Sec. 4946(a)(1)(C) through Code Sec. 4946(a)(1)(G) with someone listed in the above items;

The contribution was in the form of cash, or equivalent, which furthers the recipient organization’s exempt purposes;

The recipient organization is a new organization and has been actively engaged in seeking sources of public support and funding in order to implement the recipient organization’s charitable programs;

The recipient organization reasonably expects to attract a significant amount of public support after the grant;

The recipient organization has a representative governing body as described in Reg. § 1.509(a)-3(d)(3)(i); and

The contributor imposed no material restrictions or conditions within the meaning of Reg. § 1.507-2(a)(7).

PLR 201701023