202031009: IRS classifies a winding-down foundation's large endowment transfer as an unusual grant

Plain-English summary

A publicly supported charity expected a large grant from a nonoperating private foundation that was winding down and distributing its assets. The transfer would establish endowed funds benefiting charities in the recipient's state, with quarterly distributions made under the recipient's policies. The donor had made several earlier grants but did not control the recipient and had no organizational or leadership relationship with it. The IRS found the new grant unusual in amount, attributable to the recipient's publicly supported status, and large enough to distort its public-support calculation. It approved unusual-grant treatment under Treas. Reg. §§ 1.170A-9(f)(6)(ii) and 1.509(a)-3(c)(4), allowing the contribution to be excluded from the applicable public-support fraction.

Ruling snapshot

• Question: Could a large endowment transfer from a winding-down private foundation be treated as an unusual grant for the recipient's public-support test?
• Outcome: approved (the proposed contribution qualified as an unusual grant)
• Key authorities: Treas. Reg. §§ 1.170A-9(f)(6)(ii), 1.509(a)-3(c)(4), 1.509(a)-3(d)(3)(i), 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: 202031009
Release Date: 7/31/2020

Date: May 8, 2020

Employer Identification Number:

Person to Contact - ID#:

Contact Telephone Numbers:

LEGEND:                                        UIL: 509.02-01

C = Name
D = Time frame
E = Year
F = Name
G = Name
H = Name

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

Dear:

We have considered your 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 nonoperating private foundation within your geographic area and has supported
numerous public charities for numerous years. You will receive a grant from C in the
approximate amount of w dollars within D. You became aware of this when C notified you of its
plan in writing to cease all charitable functions, and consequently will deplete its assets within D.
As part of the winding down of its operations, C intends to establish endowed funds with you to
benefit these charities. Once the funds are established, you will make quarterly distributions to
these charities based on your policies for these types of distributions. The grant will be used in
your state by supporting charitable programs as well as establish initiatives to address gaps.
Your board will determine specifically what these funds will be used for.

Regarding previous grants from C, you received support of x dollars as part of a large pooled
grant numerous years ago to support education initiatives in your state. Furthermore, you

Letter 4787 (2-2012)
Catalog Number 58230Y

received a grant in E for y dollars for the establishment of F; you also received a grant in E for z
dollars to support H.

Concerning your relationship with C other than the grants you have received, there are no prior
or current relationships between you and C as organizations, or as relationships could extend to
your trustees, directors, or officers. C does not exercise any control over you.

This grant donation is unusual in relation to the donations that you normally receive. Although
grants from C may not be unexpected, the amount of the grant is unusual because of the fact C
is winding down its operations, depleting its assets within D and setting up endowed funds with
you.

The only condition that must be satisfied prior to the receipt of future grants is advanced
approval that these grants during B’s winding down period would be considered “unusual
grants” so as to not unduly affect your public support test.

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.

Letter 4787 (2-2012)
Catalog Number 58230Y

• 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;

Letter 4787 (2-2012)
Catalog Number 58230Y

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

○ C did not create you;
○ C has not previously contributed a substantial part of your support or endowment;
○ C does not stand in a position of authority with respect to you.

In addition, you have carried on an actual program of public solicitation and exempt
activities and have received a significant amount of public support. You also expect to
attract a significant amount of public support after the grant donation.

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

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4787 (2-2012)
Catalog Number 58230Y