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

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

News story posted in Letter Rulings on 21 January 2014| comments
audience: National Publication, Richard L. Fox, Esq. | last updated: 21 January 2014

by Richard L. Fox, Esq.

A substantial and material change in the sources of support of a public charity described in IRC §§ 170(b)(1)(A)(vi) or 509(a)(2), which are dependent on a sufficient amount of public support for their public charity status, may potentially cause an organization to lose its public charity status and be converted to a private foundation, an unfavorable result.  For example, the receipt of an unusually large contribution from a private foundation or an individual donor may cause a donee public charity to no longer have the requisite amount of public support necessary to maintain its status as a public charity, but instead may cause it to be reclassified as a private foundation.  In the world of private foundations, unless it is considered an “unusual grant” (in which case it is wholly ignored for purposes of the public support test), a concept often referred to as “tipping” occurs when a grant by a private foundation or individual donor is so significant that it “tips” a public charity out of compliance with the public support test, thereby converting it to the much less favorable private foundation status. Thus, any time a public charity is to potentially receive a substantial contribution from a private foundation or an individual donor (which is obviously a good thing from a financial standpoint) the tipping public support tax issue should be considered, including whether the contribution is considered an “unusual grant” that can be ignored for purposes of the public support tests.     

Ltr. Rul. 201342011: Tipping Doesn’t Result Because Bequest Considered an Unusual Grant

In Ltr. Rul. 201342011, a camp was created as a tax-exempt IRC § 501(c)(3) organization operating a camp for ill children.  The camp was not a private foundation, but was a public charity based on receiving a sufficient amount of public support under the public support test described in IRC § 170(b)(1)(A)(vi).  It is funded by donations, which have been received from individuals, businesses, corporations and other organizations.  The camp's public support has continued to grow. Upon his death, the founder of the camp, made a large grant in the form of a bequest to the camp. No restrictions were placed on the bequest and the founder was not an employee, board member or person in position to exercise control over the camp. The proposed bequest was large enough to endanger the camp's public support status. Therefore, the camp requested a ruling that the proposed bequest constituted an “unusual grant” that would not be considered in determining the camp's public support status.   

The IRS noted that the exclusion for unusual bequests for purposes of the public support tests 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.

The IRS then cited Reg. § 1.509(a)-3(c)(4), which 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:
  1. created the organization;
  1. previously contributed a substantial part of its support or endowment;
  1. stood in a position of authority with respect to the organization, such as a foundation manager within the meaning of section 4946(b);
  1. directly or indirectly exercised control over the organization, or
  1. was in a family relationship described IRC § 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 public support test described without the benefit of any exclusions of unusual grants;
  • Whether the organization has a governing body representative of the public interest; and
  • Whether material restrictions or conditions have been imposed by the transferor upon the transferee in connection with such transfer.

The IRS then cited Reg. § 1.509(a)-3(c)(6), Example (5) read in conjunction with Example (4) provides an example of a bequest received by an organization from an individual not in control of the governing body, in cash, with no restrictions as to its use, which contribution could be excluded as an unusual grant for the purpose of determining the one-third support test.

The IRS ruled that the bequest constituted an unusual grant, stating:

After reviewing the factors detailed in section 1.509(a)-3(c)(4) of the regulations we have determined that the proposed contribution constitutes an unusual grant. Although made by the founder, the proposed contribution is in the form of a bequest, was made in cash and has no restrictions as to its use. The founder had no authority with respect to you as an officer or board member. Further, you have carried on a program of exempt activities and have attracted public support since inception of your organization. You have met the public support tests yearly under facts and circumstances and will meet the one-third public support test if the proposed bequest is treated as an unusual grant. You are similar to the organization in Treasury Regulations section 1.509(a)-3(c)(6), Example 5.

Note on reporting unusual grants for publicly supported organizations: A publicly supported organization must demonstrate that it meets the public support test under either IRC §§ 170(b)(1)(A)(iv) or 509(a)(2) by completing Parts II and III, respectively, of Schedule A of Form 990 (Public Charity Status and Public Support).  Section A of each of such parts requires that gifts, grants and contributions be reported on line 1, but line 1 specifically states: “Do not include any unusual grants.”  Such unusual grants are also excluded from Section B of Part II and III, under which the “total support” of the organization is reported.  As a result, “unusual grants” are wholly excluded from public support and total support for purposes of computing the public support tests under Parts II and III of Schedule A of Form 990. The Instructions to Schedule A state that Part IV of Schedule A should include a schedule showing the amount of each unusual grant actually received or accrued each year, but specifically states that the names of the donors should not be included because Part IV of Schedule is made available for public inspection.

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