Art park asset transfers qualify as an unusual grant

Plain-English summary

A publicly supported charity operated an art park and museum and historically received most of its support from public sources. Related foundations proposed a reorganization that would transfer artwork, land, buildings, and other assets to the charity and a newly formed artist foundation. Some transferred art and property would carry approval rights over siting, deaccession, landscaping, development, or alternative use. The IRS found that the assets would directly further the charity's exempt purposes, the charity had an active fundraising program and a representative governing body, and the contributors did not control it. The restrictions did not prevent the charity from freely and effectively using the assets for its mission. The IRS therefore ruled that the one-time reorganization transfers were an unusual grant that could be excluded from the charity's public-support calculation.

Ruling snapshot

• Question: Could the charity exclude the reorganization transfers from its public-support calculation as an unusual grant?
• Outcome: Approved.
• Key authorities: Treas. Reg. §§ 1.170A-9(f)(6)(ii), 1.509(a)-3(c)(4), and 1.507-2(a)(8)(i).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P. O. Box 2508
Cincinnati, OH 45201

Date: 1/21/2015
Employer Identification Number:

Number: 201516069 Person to Contact - ID#:
Release Date: 4/17/2015

Contact Telephone Numbers:

LEGEND: UIL: 501.03-08

B = Organization
C = Organization
D = Trustee

F = Organization
G = Organization

H = Founder
M = Organization
N = State

P = Artist

Q = Date

R = Date

S = Date

T = Years

x = Amount
y = Amount
Dear

We have considered your February 28, 2014, request for recognition of an unusual grant under
Treasury Regulations section 1.170A-9(f)(6)(ii) and related provisions.

Based on the information provided, we have concluded that the proposed grant constitutes an
unusual grant under section 1.170A-9(f)(6)(ii) and related provisions of the regulations. The
basis for our conclusion is set forth below.

Facts:

C is a public charity described in Section 509(a)(2) of the Code. Its mission is to promote an
understanding of and appreciation for contemporary among all people by maintaining
a park composed of works by well-known and emerging American and international
artists, organizing accessible exhibitions, and interpreting these exhibitions through publications,
lectures, workshops, and educational programs. In keeping with its mission, C operates a

acre park and museum.

C has a Board of Trustees made up of nine trustees, one of whom, D, is also a Trustee
and director of each of B, F, and G. Each trustee is entitled to one vote. H, creator of B, serves
as an Emeritus Trustee of C, with no voting rights.

The above referenced Foundations intend to enter into a reorganization plan that will include the
establishment of M, an artist foundation that enhances the public understanding and
appreciation of and public art with a primary focus on the work of P. The
reorganization plan will also include a series of transfers of all B assets to C and M, with
subsequent termination of B’s private foundation status under Section 507(a)(1) of the Code
and dissolution of B under N state law. Land and buildings currently owned by F and G will be
transferred to C and M and various “start-up” grants will be paid by F and G to M.

The reorganization plan, in part, will provide for increased and ongoing financial stability and
independence for C, and promote the continued growth and expansion of the C park.

B currently owns a significant amount of P’s completed works. B also owns all of P’s incomplete
works, maquettes, and all copyrights to his work. In addition, family members of P own several
of his completed works, as do hundreds of unrelated parties. All of the existing and future works
(with the exception of completed pieces owned by P family members and private parties) and
the copyrights to all P works were previously assigned by P to B.

B also owns a substantial collection of and artwork created by other artists (the Artist
Collection) and has additional assets including cash and marketable securities, commissioned
works in progress, and property and equipment.

As part of the reorganization plan, B signed an agreement with C loaning 16 P complete works
and the Artist Collection to C. The pieces will be on loan through Q and have an estimated value
of x.

The C pieces will be transferred by B to C subject to the restriction that all future decisions by C
regarding the siting, and any de-accession of the C pieces will be subject to the sole written
approval of the M Trustee. These pieces created by P are permanently displayed and
have become associated with the C park, and are an integral to the established artistic
and setting presented there.

The Artist Collection will be transferred by B to C subject to the restriction that all future
decisions by C regarding the siting, and any de-accessions of certain iconic pieces that are
integrated with the landscape of the C park and intended to be part of the C’s

park’s permanently displayed collection, will be subject to the sole written approval of
the M Trustee. These permanently displayed iconic pieces have become associated
with the C park in the same way the other pieces discussed above, and are integral to
the established artistic and aesthetic setting presented there.

F and G currently own land and buildings that comprise the C park (the “Property)
which are valued at y. The property is subject to a lease between C, F, and G. As part of the
reorganization plan, F and G intend to transfer the property to C on or before R. Certain areas
of the property will be transferred subject to the restriction that all future decisions by C
regarding landscaping, maintenance, and any future development of those areas will be subject
to the sole written approval of the F Trustee. Additional areas of property will be
transferred subject to restrictions that all future decisions by C regarding landscaping,

maintenance and any future development of those areas will be subject to the mutual consent of
a committee composed of the C Chief Executive Officer, C Curator, and the F Trustee.

The property will also be transferred subject to restrictions that, if it can no longer be used as a

park, all future decisions by C regarding alternative use(s) of the property, transfer of
all or part of the property to another charitable entity, or merger of C with another charitable
entity, will be subject to the sole written approval of the F Trustee.

C has previously received 60.14% of its total support from public sources. C has relied in the
past on the support of visitors to the C park, art patrons, donations from the public,
governmental grants, grants from unrelated organizations, and support from its various
educational programs.

C will continue to attract a significant amount of public support subsequent to the reorganization
plan and transfer of assets from B, F, and G to C by further advancing and expanding its
fundraising and development programs. C is also focused on researching various grant
opportunities and has increased its grant funding from foundations, corporations, and
government entities over the past several years.

C currently has nine trustees, one of whom is also a Trustee and Director of each B, F,
and G. Each trustee is entitled to one vote. P currently serves as a non-voting, emeritus board
member of C. One individual serving on the C board is a nephew of P, however, his status as
P’s nephew does not make him disqualified person with respect to the Foundations or B.

The C board currently includes an entrepreneur, the trustee of a major corporation, a
and two attorneys. Several board members also serve as directors and officers of unrelated
nonprofit and for profit organizations.

Law:

Treasury Regulations sections 1.170A-9(f)(6)(ii) and 1.509(a)-3(c)(4) set forth the criteria for an
unusual grant.

Treasury Regulations section 1.170A-9(f)(6)(ii) states that, for purposes of applying the 2-percent
limitation to determine whether the 33 1/3 percent-of-support test is satisfied, one or more
contributions 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.

Treasury Regulations section 1.509(a)-3(c)(4) 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

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 section 4946(b)

d. directly or indirectly exercised control over the organization, or

e. was in a relationship described in Internal Revenue Code section 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 support test described in section 1.509(a)-3(a)(2)
without the benefit of any exclusions of unusual grants pursuant to section 1.509-
3(c)(3);

• Whether the organization has a representative governing body as described in
Treasury Regulations section 1.509(a)-3(d)(3)(i); and

• Whether material restrictions or conditions within the meaning of Treasury

Regulations section 1.507-2(a)(7) have been imposed by the transferor upon the
transferee in connection with such transfer.

Application of Law:

There are several factors to take into consideration when determining whether the assets
transferred by the reorganization plan constitute an unusual grant. First of all, the C

park was originally created and developed by P as a project of G. B currently loans a significant
amount of to C at no cost for display at the C park. In addition, C currently

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leases the property from F and G at no cost. These foundations have been substantial
contributors to C since its inception. Although P originally created C, C currently has nine
trustees. One trustee is a Class B Trustee and Director of each B, F, and G. However, each
trustee is only entitled to one vote. Additionally, P currently serves as a non-voting, emeritus
board member of C.

Next, it is important to consider whether the contribution is in the form of cash, marketable
securities, or assets which further the exempt purpose of the organization, such as a gift of a
painting to a museum. C will use the contributions of art collections and property to further its
exempt purpose of operating the C park and educating the public about contemporary

. C’s ownership of the art collections and property will support its long-term
sustainability as an independent organization, provide increased and ongoing financial stability
for C, and enable it to attract financial support and donations of artwork for its collection.

Another factor in making the determination is whether the organization previously carried on an
actual program of public solicitation and exempt activities and whether it has been able to attract
a significant amount of public support. Additionally, it is important to look at whether the
organization is expected to continue to attract public support after the assets are transferred. C
is publicly supported. It solicits contributions from individual donors and grants from unrelated
organizations and governmental entities. C has relied in the past on the financial support of
visitors to and members of the C park, art patrons, donations from the public, grants
and revenue from its educational programs and other related sources. C will continue to attract
a significant amount of public support subsequent to the reorganization plan and transfer of
assets by further advancing and expanding its fundraising and development programs.
Fundraising begins at the individual level through the C Annual Fund, which provides
unrestricted income for programs and operation, but also serves to bring in new donors to
broaden C’s base of support and identify major gift prospects. C also maintains major gift and
planned giving programs. In order to accomplish the continued expansion of its development
and fundraising efforts, C relies on its Director of Development and Development Associate,
both full-time employees, and on its Executive Director of Marketing. C has also expanded its
use of board members and other volunteers for fundraising purposes, and developed and
improved its website to secure and maximize C’s capacity to attract online contributions.

Another factor to consider is whether the organization has excluded unusual grants in prior
years in order to meet it one third public support test. C has relied on the unusual grant
exclusion once in its 13 year history. In the fiscal year ending S, C relied on the unusual grant
exclusion to exclude B debt forgiveness. B had provided several loans to C, which B forgave
during C’s T fiscal years. C had not relied on the unusual grant exclusion prior to T.

The next item to consider is whether the grantee organization is controlled, directly or indirectly,
by the contributor, or any person standing in a relationship to the contributor which is described
in Section 4946(a)(1)(C) through (G) of the Code and whether the organization has a
representative governing body. C currently has nine trustees. It has a representative governing
body comprised of an entrepreneur, a trustee of a major corporation, two attorneys, and a

. Several board members also serve as directors and officers of unrelated foundations.
Each trustee is entitled to one vote. Only one board member is also a Trustee and
Director of B, F, and G. Moreover, the Foundations do not directly or indirectly control C either
by power of appointment or overlapping boards. P currently serves as a non-voting, emeritus
board member of C.

The final factor to consider is whether or not material restrictions or conditions have been
imposed by the contributor upon the organization in connection with the contribution.
Section 1.507-2(a)(8)(i) provides that a material restriction or condition is one that prevents the
transferee organization from freely and effectively using the contribution, or the income derived
therefrom, in furtherance of its exempt purposes. The reorganization transfers under the
reorganization plan will constitute a complete transfer of ownership of the assets to C. All
assets included in the transfers will be held and administered by C in a manner consistent with
one or more of its exempt purposes. The foundations plan to place certain restrictions on some
of the assets included in the reorganization transfers. However such restrictions will not prevent
the C board from having and maintaining ultimate authority and control over the transferred
assets. For instance, certain art pieces will be transferred and subject to the restriction that all
future decisions by C regarding the siting, re-sitting, and any de-accession of these pieces will
be subject to the sole written approval of the M Trustee. The restriction does not
prevent C from freely and effectively using the artwork in support of its mission to maintain a
park composed of works by well-known and emerging American and international

artists. In addition, certain areas of the property will be transferred subject to the restriction that
all future decisions by C regarding landscaping, maintenance, and any future development of
those areas will be subject to the sole written approval of the F Trustee. Additional area
of property will be transferred subject to restrictions that all future decisions by C regarding
landscaping, maintenance and any future development of those areas will be subject to the
mutual consent of a committee composed of the C Chief Executive Officer, C Curator, and the F

Trustee. The property will also be transferred subject to restrictions that, if it can no
longer be used as a park, all future decisions by C regarding alternative use(s) of the
property, transfer of all or part of the property to another charitable entity, or merger of C with
another charitable entity, will be subject to the sole written approval of the F Trustee.
This last restriction is not material because it does not take effect unless it is impossible for C to
use the property to operate a park. It the Property is used and operated as a

park, C will not be prevented from freely and effectively using the property in

furtherance of its exempt purposes.

In conclusion, the following seven factors from Section 1.509(a)-3(c)(4) of the Regulations
support C’s exclusion of the reorganization transfers from its public support calculation as an
unusual grant: 1) the transferred assets will be used by C in furtherance of its exempt purpose,
2) C carries on a program of public fundraising and was publicly supported in the past, 3) C can
expect to attract a significant amount of public support subsequent to the transfers, 4) C
previously relied on the unusual grant exclusion only once before in its 13 year history, 5) C is
not controlled, directly or indirectly, by disqualified persons or organizations, 6) C has a
representative governing body, and 7) B, F, and G will not impose material restrictions or
conditions on the assets transferred as part of the transfers. In addition, the reorganization
transfers will occur pursuant to the reorganization plan, and the IRS has repeatedly recognized
that the transfer of funds and assets between related organizations pursuant to a reorganization
plan constitutes unusual grants.

The transfers pursuant to the reorganization plan should constitute an unusual grant. They are
associated with the reorganization plan, are one-time transfers, and would adversely affect C’s
status as normally being a publicly supported. C will use the assets transferred directly in
furtherance of its exempt purposes, and the transferred assets will provide for increased and
ongoing financial stability and independence for C, and promote the continued growth and
expansion of the C park. C has received public support since its inception, and can
reasonably expect to attract a significant amount of public support following its receipt of the
reorganization transfers. Finally, although P founded the park and serves as a trustee

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and director of the related foundations, he serves as a non-voting member of the C board. He
does not directly or indirectly, exercise control over C.

For all the forgoing reasons, the reorganization transfers should be characterized as an unusual
grant within the meaning of Treasury Regulations section 1.509(a)-3(c)(4).
If you have any questions, please contact the person listed in the heading of this letter.

Sincerely,

Director, Exempt Organizations