IRS treats a large trust grant to a theater company as an "unusual grant," protecting its public-charity status

Plain-English summary

A public charity keeps that status only if it draws a broad base of public
support; one very large gift can distort the math and threaten the charity's
classification. To handle that, the tax rules let a big, unexpected gift from a
disinterested donor be treated as an "unusual grant" and left out of the
public-support calculation entirely. Here a theater company classified as a
public charity under IRC §§ 509(a)(1) and 170(b)(1)(A)(vi) expected a large cash
grant from a trust (created by someone unrelated to the charity's leadership,
whose intended foundation no longer existed). The IRS reviewed the facts against
Treas. Reg. §§ 1.170A-9(f)(6)(ii) and 1.509(a)-3(c)(4) and concluded the grant
is an unusual grant: it came from a disinterested party, was attracted by the
charity's publicly supported nature, was unusual in amount, and the charity has
a real record of public solicitation and support with a broad governing body. So
the grant is excluded from the public-support fraction and does not jeopardize
the theater company's public-charity status.

Ruling snapshot

• Question: Does the expected large grant from the trust qualify as an
  "unusual grant" excluded from the charity's public-support computation?
• Outcome: approved (treated as an unusual grant)
• Key authorities: IRC §§ 509(a)(1), 170(b)(1)(A)(vi); Treas. Reg.
  §§ 1.170A-9(f)(6)(ii), 1.509(a)-3(c)(4)

Full text (IRS public release)

Department of the Treasury Date: 4/20/2022
Internal Revenue Service
Tax Exempt and Government Entities

P.O. Box 2508 Employer ID number:
Cincinnati, OH 45201
Person to contact:
[_] Check if valid POA
Number: 202228019
Release Date: 7/15/2022

LEGEND UIL: 509.02-01
B = individual 1
C = state 1
D = year 1
E = state 2
F = year 2
G = individual 2
H = trust
I = date
x dollars = amount

Dear

We have considered your June , 20 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 IRC Sections 509(a)(1) and 170(b)(1)(A)(vi). You are a theater
company, and have staged over _ productions regionally, nationally, and internationally.

You were incorporated by B in C in D. You dissolved then reincorporated in E in F, with B again as your
creator. B is the of G.

You are expecting to receive a grant of x dollars from H. G, who died on I, created H. H stipulated funds were
to be given to a foundation related to G; that foundation is no longer in existence therefore H must select
another 501(c)(3) charity per its provisions. The rest of your current officers and board of directors are not
related to G. The current trustees of H are also not your current officers or board of directors.

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 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 which:

• Was attracted by reason of your publicly supported nature;
• Is unusual or unexpected with respect to the amount; and
• Will adversely affect your status as normally being publicly supported.

The grant meets the requirements of Treas. Reg. Section 1.509(a)-3(c)(4) based on the following facts and
circumstances:

a) The grant was not made by a person who created or previously contributed a substantial amount of funds to
you. H was not your creator, and has not made any contributions to you in the past.

b) The grantors do not stand in a position of authority or exercise control over you

c) The grant is in the form of cash.

d) Prior to the receipt of this contribution, you have carried on an actual program of public solicitation and
exempt activities and have been able to attract a significant amount of public support.

e) You have a large representative governing body.

f) You have met the public support test in past years.

g) It can be assumed you will be able to maintain a level of public support in the future.

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

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