IRS denies "unusual grant" treatment for a repeat donor's endowment gift

Plain-English summary

A publicly supported educational charity asked the IRS to treat a large one-time
gift as an "unusual grant." That label matters because public charities must keep
a broad base of public support to hold their status, and a single huge donation
can distort the math; an unusual grant can be excluded from the support test so
it does not knock the organization out of public-charity status. Here the proposed
gift came from a donor that had already provided a substantial share of the
charity's revenue for years. The IRS concluded the donor was not a disinterested
party and that a further gift from a long-time major supporter is neither unusual
nor unexpected, so it does not qualify under Treas. Reg. § 1.170A-9(f)(6)(ii) and
§ 1.509(a)-3(c)(4). The IRS distinguished Revenue Ruling 76-440, where the gift
came from a disinterested donor. This is a proposed adverse determination, meaning
the charity was denied the exclusion and given a chance to respond before it becomes
final.

Ruling snapshot

• Question: Does a large gift from a donor who has long provided substantial support qualify as an excludable "unusual grant"?
• Outcome: Denied (proposed adverse determination)
• Key authorities: Treas. Reg. § 1.170A-9(f)(6)(ii); Treas. Reg. § 1.509(a)-3(c)(4); Rev. Rul. 76-440; IRC § 4946

Full text (IRS public release)

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

Release Number: 201850023
Release Date: 12/14/2018
Date: September 17, 2018
Person to Contact / ID Number:

Contact Telephone Numbers:

Employer Identification Number:

LEGEND UIL

B = state 509.02-01
C = foundation

D = award

E = program

p = number

q = number

r dollars = amount

Dear

This is in response to your request dated October 5, 2017 for advance approval that a
potential grant or contribution constitutes an "unusual grant".

Based on information submitted, we've determined that you don't meet the
requirements for approval of your request. The basis for our conclusion is set forth in
Enclosure 1.

We'll make our proposed adverse determination letter available for public inspection
under Internal Revenue Code Section 6110 after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the
two attached letters that show our proposed deletions.

If you disagree with our proposed deletions, you should follow the instructions in Notice

437. If you agree with our deletions, you don't need to take any further action.

For important information about your responsibilities as a tax-exempt organization, go to
www.irs.gov/charities. Enter "4221-PC" in the search bar to view Publication 4221-PC,

Letter 4786 (3-2012)
Catalog Number 58229X

Compliance Guide for 501(c)(3) Public Charities, which describes your recordkeeping,
reporting, and disclosure requirements.

You should keep a copy of this letter in your permanent records.

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 whose name and telephone are
shown in the heading of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Enclosure 1
Notice 437

Letter 4786 (3-2012)
Catalog Number 58229X

Enclosure 1

Facts

You are a B corporation that qualifies as an organization under Sections 501(c)(3) and
170(b)(1)(A)(iv) of the Internal Revenue Code. You are primarily an educational and
academic organization

On October 5, 2017, you requested a potential grant be classified as an unusual grant.
C proposed a one-time inter vivos contribution of r dollars to you to provide permanent
support for two core programs, D and E. C represents there will be no material
restrictions or conditions regarding the grant; other than restrictions which are
consistent with the establishment and maintenance of an endowment fund under B law,
and the gift be administered as an endowment fund for certain named programs
previously supported by C in furtherance of your charitable purposes and mission. C
has previously contributed a substantial part of your support; approximately p% of your
total FY revenue and q% of FY . You cite revenue ruling 76-440 as authority
supporting your position for the grant being classified as unusual.

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.

Treas. Reg. 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.

Treas. Reg. 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)

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Letter 4786 (3-2012)
Catalog Number 58229X

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
Treas. Reg. Section 1.509(a)-3(d)(3)(i); and

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

Revenue Ruling 76-440 states in part that a large inter vivos gift of undeveloped land
from a disinterested donor to a normally publicly supported organization exempt under
Section 501(c)(3) of the Code, conditioned on the land's being used in perpetuity to
further the exempt organization's purposes of preserving natural resources, constitutes
an unusual grant and will not adversely affect the status of the organization as a publicly

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Letter 4786 (3-2012)
Catalog Number 58229X

supported organization. The gift in question was made by an otherwise disinterested
party. Neither the donor nor any person whose relationship to the donor is described in
Section 4946(a)(1)(C) through (G) of the Code created the organization, previously
contributed a substantial part of the organization's support or endowment, or stands in a
position of authority with respect to the organization.

Application of Law

We have concluded the proposed grant does not constitute an unusual grant under
Treas. Reg. Section 1.170A-9(f)(6)(ii) based on the information provided. The donor, C,
is not a disinterested party as they have previously and continually contributed to you
substantial revenue.

We find you are distinguishable from Revenue Ruling 76-440. Due to the historic
relationship between you and C the proposed grant is not unusual or unexpected.
Subsequent grants from the same donor are logically more usual and more expected.
While not determinative, the other factors weighing on whether the grant is considered
unusual, as outlined in the Regulations as well as Revenue Ruling 76-440, are that the
proposed cash transfer is inter vivos, not by bequest, and is not attracted by reason of
the your publicly supported nature, but by your continual relationship with the donor.

Letter 4786 (3-2012)
Catalog Number 58229X