IRS treats a large multi-year grant to an arts public charity as an "unusual grant," protecting its public-support status

Plain-English summary

A small arts public charity, classified under IRC § 509(a)(2), asked the IRS whether a large grant it expected to receive would count as an "unusual grant." The charity advocates for a particular cultural community's visual art and artists. Its yearly gross receipts had been under $50,000, but another organization's board offered a much larger multi-year grant to fund a new artist fellowship program. That kind of one-time windfall can distort the math of the public-support test and, ironically, threaten a charity's public-charity status by making one donor look too dominant. Under Treas. Reg. § 1.170A-9(f)(6)(ii) and § 1.509(a)-3(c)(4), a qualifying "unusual grant" is pulled out of both the top and bottom of the support fraction, so it does not hurt that status. The IRS concluded the grant qualifies: it comes from a disinterested party with no control over the charity, is cash used for exempt purposes, is unusual in size, and carries no strings attached. Practical upshot: the charity can accept the big grant without losing its public-charity classification.

Ruling snapshot

• Question: Does a large, multi-year grant to a § 509(a)(2) arts charity qualify as an "unusual grant" that is excluded from the public-support test?
• Outcome: Approved (unusual-grant treatment granted)
• Key authorities: Treas. Reg. § 1.170A-9(f)(6)(ii); Treas. Reg. § 1.509(a)-3(c)(4); IRC §§ 509, 170

Full text (IRS public release)

Department of the Treasury                          Date: 04/13/2022
Internal Revenue Service
Tax Exempt and Government Entities                  Employer ID number:

Cincinnati, OH 45201

                                                    Person to contact:

Release Number: 202227016
Release Date: 7/8/2022

LEGEND                                              UIL: 509.02-01
B= Organization
C= Culture
x dollars = Amount

Dear

We have considered your March 11, 2021 request for recognition of an unusual grant under Treasury
Regulation Section 1.170A-9(f)(6)(ii) and related provisions.

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

Facts:

You are classified as a public charity under Internal Revenue Code (IRC) Section 509(a)(2). You are dedicated
to advocate for C visual art, artists, and art history and your mission is to foster understanding of rich diversity
and cross-cutting complexity of the C community. Your gross receipts were less than $50,000 between

and         and had filed Form 990-N since your formation. You are able to raise a growing influx of donations
and grants from a broad spectrum of individuals and other IRC Section 501(c)(3) organizations.

B's board of trustees notified you their interest in providing a grant in the amount of x dollars for a new C artists
fellowship program. The program will address the underrepresentation and invisibility of the rich contributions
of C artists and creatives to American art and culture. It is an unconditional grant and would provide funding for
the fellowship program over a five-year period.

The grant from B is highly unusual to you in terms of your historical fundraising results and the magnitude of
the grant amount. You expect that you will meet the public support test in future years. B has not previously
supported you and is a disinterested party. B does not directly or indirectly exercise control over you and you
have a representative governing body.

Law:

Two sections of the Treasury Regulations set forth the criteria for an unusual grant. They are:

Treasury Regulation Section 1.170A-9(f)(6)(ii)
This section states that, for purposes of applying the 2% limitation to determine whether the 33 1/3% of-support
test is satisfied or the 10 % support limitation is met, 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 Regulation Section 1.509(a)-3(c)(4)
This section 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 Internal Revenue Code (IRC) Section 4946(b);

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

    e. was in a relationship described in IRC 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 bullets a through 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 Treas. Reg. Section 1.509(a)-3(a)(2) without the benefit of any
exclusions of unusual grants pursuant to Treas. Reg. Section 1.509-3(c)(3);

* Whether the organization has a representative governing body as described in 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.

Application of Law:

The grant meets the requirements of Treas. Reg. Section 1.170A-9(f)(6)(ii) because the grant is from a
disinterested party, is attracted by reason of your publicly supported nature, is considered unusual and
unexpected with respect to the amount, and would, by reason of the size, adversely affect your status 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. Factors considered include:

* The contribution is not made by any person who created you, previously contributed a substantial part of your
support, stood in a position of authority over you, or directly or indirectly exercised control over you.

* The contribution is a cash contribution that will be used to further your exempt purposes.

* You have carried on an actual program of public solicitation and exempt activities and have been able to
attract public support.

* You can reasonably be expected to attract a significant amount of public support after this contribution.

* You have a representative governing body.

* There are no material restrictions or conditions imposed by the transferor in connection with such transfer.

For all the foregoing reasons, the prospective grant should be characterized as an unusual grant within the
meaning of Treas. Reg. Section 1.509(a)-3(c)(4).

We'll make this determination letter available for public inspection after deleting personally identifiable information,
as required by IRC Section 6110. We've enclosed Letter 437, Notice of Intention to Disclose - Rulings, and a
copy of the letter that shows our proposed deletions.

* If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us.
* If you agree with our deletions, you don't need to take any further action.

If you have questions, please contact the person listed at the top of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Redacted Letter 4787
Letter 437

Letter 4787 (Rev. 11-2021)
Catalog Number 58230Y