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PLR 201621015

In a private letter ruling, IRS has held that a gift to a charity that provides help to children of low-income families qualified as an unusual grant and thus could be excluded when applying the rule that provides that publicly supported charities that receive more than 2% of their support from any one individual, corporation, etc. don’t qualify as 50% charities.

Background. Contributions by an individual to an organization that is a “50% charity” are deductible up to 50% of the donor’s contribution base (Code Sec. 170(b)(1)(A)), which is the donor’s adjusted gross income, computed without any net operating loss carryback deduction. (Code Sec. 170(b)(1)(G))

One type of 50% charity is a publicly supported organization. To qualify as a 50% charity, a publicly supported organization must normally receive a substantial part of its support (excluding amounts received from the performance of exempt functions) from either governmental bodies or from direct or indirect contributions from the general public. (Code Sec. 170(b)(1)(A)(vi))

In determining “substantial part” for purposes of the rule of Code Sec. 170(b)(1)(A)(vi), regs have established a 1/3-of-support test (Reg. § 1.170A-9(f)(2)) and a 10%/facts and circumstances test (Reg. § 1.170A-9(f)(3)).

In determining whether the 1/3-of-support test or the 10%/facts and circumstances test is met, contributions by an individual, trust, or corporation are taken into account as “support” from the general public only to the extent the total amount of the contributions by any individual, etc. doesn’t exceed 2% of the organization’s total support during the applicable measuring period, except where the rule on the exclusion of “unusual grants” applies. (Reg. § 1.170A-9(f)(6)(i))

That rule provides that, for purposes of applying the 2% limitation to determine whether the 1/3-of-support test is satisfied, one or more unusual grants 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 would, by reason of their size, adversely affect the status of the organization as normally being publicly supported. (Reg. § 1.170A-9(f)(6)(ii))

Reg. § 170A-9(f)(6)(iii) 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. This section references Reg. § 1.509(a)-3(c)(4) and states 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 Code Sec. 4946(b);
d. directly or indirectly exercised control over the organization; or
e. was in a relationship described in Code Sec. 4946(a)(1)(C) through Code Sec. 4946(a)(1)(G) with someone listed in items (a), (b), (c), or (d) above.

A contribution made by a person described in (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.

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

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

Facts. The taxpayer is a public charity under Code Sec. 509(a)(1) and Code Sec. 170(b)(1)(A)(vi). The mission of the organization is to provide high impact educational programs and opportunities to children and their families particularly at-risk and low-income, working families, to help them achieve their full intellectual, economic, and social potential.

The grant at issue is from D and will be used by the taxpayer to expand and enhance two existing programs for low-income working and military families, and establish a new afterschool and summer program for adolescents and teens.

The grant will not made by any person or persons standing in a relationship to the taxpayer or such person which is described in section Code Sec. 4946(a)(1)(C) through Code Sec. 4946(a)(1)(G)); and D has not previously contributed to any part of the taxpayer’s support or endowment, or stood in a position of authority (within the meaning of Code Sec. 4946(b)). The grant will be in the form of cash and readily marketable securities.

Since the taxpayer’s organization was founded, and prior to the receipt of this grant, the taxpayer carried on an actual and robust program of public solicitation and exempt activities. Led by a staff of full-time professionals, including the taxpayer’s president, it raised over x dollars annually in public support through a combination of special events, direct mail appeals, and grants. This public support came from over 20 individual, foundation, and corporate donors. The taxpayer’s total support is generated from activities related directly to the mission of the organization, excluding revenue from fee-for-services and investment income. The taxpayer depends heavily on public support—which provides nearly 25% of the taxpayer’s annual operating budget.

The grant is not ongoing and, therefore, the taxpayer will need to continue to attract and secure a significant amount of public support subsequent to this particular grant. Ongoing support to the taxpayer will be generated through the taxpayer’s current fundraising activities, which existed prior to receipt of this unusual grant. Funding of the taxpayer’s current and future operating expenses will be independent of and not reliant on unusual grants.

The taxpayer has, since the taxpayer’s inception and prior to receipt of this unusual grant, met the one-third support test described in Reg. § 1.170A-9(f)(2) without the benefit of any exclusions of unusual grants pursuant to Reg. § 1.170A-9(f)(6)(ii).

The taxpayer’s board of trustees is a representative governing body as described in Reg. § 1.509(a)-3(d)(3)(i).

No material restrictions or conditions (within the meaning of Reg. § 1.507-2(a)(7)) have been imposed by the transferor upon the transferee in connection with the grant.

The grant qualified as an unusual grant. IRS concluded that the grant met the criteria for exclusion since the contribution was attracted by the reason of the publicly supported nature of the taxpayer’s organization, is unusual or unexpected with respect to the amount, and would by reason of the size adversely affect the status of the taxpayer’s organization as normally being publicly supported.

IRS also noted that the grant met the criteria for exclusion under Reg. § 1.170A-9(f)(6)(ii) and Reg. § 1.509(a)-3(c)(4). It was not made by a disqualified person and was in the form of cash and readily marketable securities. Also, prior to the receipt of the grant, taxpayer carried on an actual program of public solicitation and exempt activities and was able to attract a significant amount of public support. The taxpayer expected to attract a significant amount of public support after the particular contribution. Prior to the year in which the grant will be received, the taxpayer met the 1/3-support test described in Reg. § 1.170A-9(f)(2) without the benefit of any exclusions of unusual grants pursuant to Reg. § 1.170A-9(f)(6)(ii). It had a representative governing body as described in Reg. § 1.509(a)-3(d)(3)(i), and no material restrictions or conditions within the meaning of Reg. § 1.507-2(a)(7) were imposed by the transferor upon the transferee in connection with the grant.

References: For unusual grants and the support tests for publicly supported charities, see FTC 2d/FIN ¶  K-3787  ; United States Tax Reporter ¶  1704.08  ; TaxDesk ¶  333,151  .

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