IRS treats a large bargain-sale contribution as an unusual grant

Plain-English summary

A long-established public charity expected to acquire nonvoting corporate stock from three grantors in a bargain sale, paying part of the stock's value with a 20-year promissory note. The difference between the stock's estimated value and the note would be a large charitable contribution that could otherwise disrupt the charity's public-support calculation. The grantors had not created, controlled, managed, or previously supported the charity, and neither they nor related disqualified persons would control the charity or the corporation. The transfer was expected to be one-time, the charity had a representative board and a long record of public solicitation, and it expected continued public support. The IRS concluded that the contribution qualified as an unusual grant under the regulations, while stating that the letter did not rule on the bargain-sale transaction itself.

Ruling snapshot

• Question: May the charity exclude the bargain-sale contribution as an unusual grant when measuring public support?
• Outcome: Approved
• Key authorities: IRC §§ 170(b)(1)(A)(vi), 501(c)(3), 509(a)(1), and 4946; Treas. Reg. §§ 1.170A-9(f)(6)(ii), 1.509(a)-3(c)(4), and 1.507-2(a)(7)

Full text (IRS public release)

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

Number: 201620016 Employer Identification Number:

Release Date: 5/13/2016
Person to Contact - ID#:

Contact Telephone Numbers:
Date: February 17, 2016

LEGEND: UIL: 509.02-01

B = Grantor

C = Grantor

D = Grantor

E = Corporation

x dollars = Amount
y dollars = Amount
z dollars = Amount

Dear

We have considered your October 8, 2015, 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:

You are a nonprofit corporation exempt from taxation under Section 501(c)(3) of the Internal
Revenue Code of 1986 and classified as a public charity under Sections 509(a)(1) and
170(b)(1)(A)(vi) of the Code. You have carried on a program of public solicitation and exempt
activities for 30 years and you expect to attract a significant amount of public support in the
future. You fully anticipate that you will meet the one-third support test in the year preceding the
year that the grant will be made without the benefit of exclusions of any unusual grants. You are
entirely funded by contributions from E employees and you donate the contributions charities
that are exempt under section 501(c)(3) of the Code. Your board of directors is made up of a
group of diverse individuals with an array of expertise in their respective career fields.

The Co-Trustees of grantors B, C, and D, desire to engage in a bargain sale with you where you
will receive shares of non-voting stock of E that will represent approximately thirty percent (30%)
of the total value of all issued and outstanding shares of E stock. The shares of stock have an
estimated value of y dollars. These shares will be sold to you in exchange for a promissory note
in the principal amount of z dollars having a 20 year term and bearing interest at a rate greater
than or equal to the long term applicable federal rate in effect for the month in which the

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promissory note is issued. The promissory note will require interest payments to be made at
least annually but will not require any principal payments until the maturity date of the note. This
sale will result in a charitable gift to you of approximately x dollars. The grant will assist you in
furthering your tax-exempt purposes and enable you to expand your charitable initiatives. The
grant will be made to you as an inter vivos transfer in the sense that the grantors’ existence will
not terminate after the grant is made. However, you compare the grant to a bequest because it
is a one-time transfer of funds to you and no other grants are expected to be made.

The only conditions prior to receipt of the grant are that the grant is classified as an unusual
grant, that you continue to be exempt under section 501(c)(3) of the Code and classified as a
public charity under sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code, and written approval of
the grant be provided by the beneficiaries. Additionally, the grantors will have previously entered
into a shareholders agreement in which provides E and the non-selling shareholders a right of
first refusal upon any sale of stock. However, the grantors will not have any input with respect to
whether the right is exercised since the grantors nor any other disqualified person with respect
to the grantors will have control over E or you.

Due to its size, the grant will adversely affect your status as normally being publicly supported
under section 170(b)(1)(A)(vi) for the applicable period. You state the grant is unusual and
unexpected as the grantors have made no previous grants to you and have no intention of
making future grants. The grantors did not create you and are not in a position of authority as a
foundation manager or otherwise with respect to you or at any point during your existence.
Neither the grantors nor any disqualified person with respect to the grantors have exercised, do
exercise, or will exercise direct or indirect control over you. Additionally, the grant is not being
made by anyone standing in a relationship to the grantors which is described in sections
4946(a)(1)(C) through 4946(a)(1)(G) of the Code.

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

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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:

The grant meets the requirements of Treasury Regulations section 1.170A-9(f)(6)(ii) because
the grant is from a disinterested party, and:

• The grant was attracted by reason of your publicly supported nature

• The grant is unusual or unexpected with respect to the amount

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• The grant will adversely affect your status as normally being publicly supported

The grant meets the requirements of Treasury Regulations section 1.509(a)-3(c)(4) based on
the following facts and circumstances.

• The grantors are a disinterested party in that:

a. B, C and D did not create you

b. B, C and D have not previously contributed a substantial part of your support or
endowment

c. B, C and D do not stand in a position of authority with respect to you

d. B, C and D do not directly or indirectly exercise control over you

e. B, C and D were not in a relationship described in Internal Revenue Code section
4946(a)(1)(c) through 4946(a)(1)(G) with someone listed in items a, b, c or d
above

• The grant is similar to an inter vivos transfer resulting from a bargain sale of marketable
securities. This notice cannot rule on the bargain sale transaction. However, the transfer
via bargain sale is a one-time transaction to you before which and after which no
additional grants are expected to be made by the grantors to you.

• The grant will consist of non-voting shares of E and will enable you to expand your
charitable activities.

• You have carried on an actual program of public solicitation and exempt activities for
many years and you have been able to attract a significant amount of public support.

• You expect to attract a significant amount of public support after the grant.

• Prior to the year in which the contribution will be received, you expect to meet 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).

• You have a representative governing body as described in Treasury Regulations section
1.509(a)-3(d)(3)(i). Your board of directors is comprised of individuals with an array of
expertise in their respective career fields that ensure the board has sufficient diversity
and is well governed.

• No 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.

For all the forgoing reasons, the grant should be characterized as an unusual grant within the
meaning of Treasury Regulations section 1.509(a)-3(c)(4).

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We have sent a copy of this letter to your representative as indicated in your power of attorney.

If you have any questions, please contact the person listed in the heading of this letter.

Sincerely,

Jeffrey I. Cooper

Director, Exempt Organizations
Rulings and Agreements

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