On September 28, 2012, the U.S. Internal Revenue Service published a private letter ruling regarding the ability of an organization, which is recognized as a charity under Section 501(c)(3) of the Internal Revenue Code, to retain its public charity status in the face of an unusually large grant from a single contributor. PLR 20123901.
PUBLIC CHARITY VS. PRIVATE FOUNDATION. An IRC § 501(c)(3) charity is presumed to be a private foundation unless it establishes that it is publicly supported. Because private foundations are subject to much stricter regulation than public charities, most charities that are able to do so try to establish that they are publicly supported. For the great majority of charities, public support can be proved by satisfying one of two alternative tests (explained in simplified form): (1) by normally receiving at least one-third of their support from governmental units, from direct or indirect contributions by the general public, or from a combination of those sources; or (2) by receiving at least 10 percent of their total support from public sources and establishing, with regard to facts and circumstances contained in IRS regulations, that they are operated more like a public charity than like a private foundation. In each case, the percentage of support is determined with reference to a fraction whose numerator is the sum of all support deemed “public,” and whose denominator is the sum of all support from all sources.
“TIPPING” AWAY FROM PUBLIC SUPPORT. Under both the 1/3 public support test and the 10% public support test, contributions from an individual, trust, or corporation are only counted as “public” support to the extent that the total contributions from that contributor in the current tax year, and in the four year period immediately before the current tax year, do not exceed 2% of the organization’s total support for the same period. One consequence of the 2% rule is that a large grant from a foundation may cause a recipient to to fail the public support test. To lessen the effect of this phenomenon–sometimes called “tipping”–Treas. Reg. § 1.170A-9(e)(6) provides that, in certain limited circumstances, an “unusual grant” may be excluded when calculating an organization’s public support.
THE REQUESTER: AN ANIMAL WELFARE ORGANIZATION. In this case, the exempt organization that requested an IRS ruling operated a low-cost spay and neuter clinic for cats and dogs, and provided educational materials regarding pet care. The organization’s financial support consisted of fees for services, contributions, and unrelated income. The organization had been classified as a private foundation at the end of its advance ruling period. However, it requested reclassification, and was being treated as a public charity for an advance period of 60 months.
PROPOSED GRANT FROM FOUNDING DONOR. The organization wanted to build an animal shelter and adoption center for stray cats and dogs. One of the organization’s founders, a “continuing donor” who had contributed substantial funds to the organization over a ten year period, proposed to give the organization a significant sum of money to enable it to construct the shelter and adoption center. However, the contribution was contingent upon the organization’s receiving a ruling from the IRS that it would not “tip” the organization from public charity to private foundation status. Accordingly, the organization asked the IRS to confirm that the proposed contribution would be an “unusual grant,” which would not be taken into consideration when determining the organization’s public support.
THE SERVICE’S RULING. The IRS ruled that the proposed contribution would not constitute an “unusual grant,” and therefore could not be excluded from consideration in determining the percentage of the organization’s public support. The Service explained that the exclusion of unusual grants “is generally intended to apply to contributions or bequests from disinterested parties,” where such contributions or bequests–
A. Are attracted by reason of the publicly supported nature of the organization; and
B. Are unusual or unexpected with respect to the amount thereof; and
C. Would, by reason of their size, adversely affect the status of the organization as being normally publicly supported for the applicable period….
The IRS determined that, “While the proposed grant may adversely affect your public charity status, it is not attracted by reason of your publicly supported nature and is not unusual or unexpected with respect to the amount thereof.” The Service based this conclusion on several facts, including:
- the organization received multiple large grants from the donor over the course of a decade;
- the purpose of the proposed grant was the same as that which underlay the donor’s initial contributions;
- the “overwhelming majority” of the organization’s total support since inception came from the same donor;
- the donor’s spouse was the chairman and president of the organization; and
- the executive director of the organization was the daughter of the donor’s spouse.
In light of the above factors, the IRS concluded that the proposed grant was attracted because of the organization’s “historical relationship” with the donor, and was not unexpected as to either its occurrence or amount. Therefore, the contribution did not qualify as an unusual grant.
by Shawn N. Sullivan, Oct. 2, 2012.