Unusual Grants and Public Charity Status

• October 31, 2023
• Ally Spielvogel

It is important for an organization to monitor its public charity status because if it fails to maintain public charity status it may be treated as a private foundation. This is something that could adversely affect fundraising appeal to donors because of different tax deduction limits for contributions made to private foundations versus public charities. The most direct tracking method to monitor the public support test is through Schedule A, Public Charity Status and Public Support. Schedule A is a supplemental schedule to the Federal Form 990. This schedule is where an organization discloses compliance information about its public charity status to the public and the IRS.

There are two computations of public support percentage calculations on Schedule A. The calculation an organization completes is dependent on which type of publicly support organization it identifies as in Part I of the schedule. Gifts, grants, contributions, and membership fees per Form 990, Part VIII, Line 1, are included in both public support computations. However, there are certain situations when an organization receives an unusual grant that could jeopardize that calculation. 

An unusual grant is a significant and unexpected grant or bequest received from a disinterested party that also meets the below three other criteria.

1. The donor is attracted by the nature of the publicly supported organization,
2. The grant or bequest is of an unusual or unexpected amount, and
3. The grant would, because of its size, adversely affect the organization’s publicly supported status.

There is no one factor that is the deciding factor if a grant is unusual; rather it must be evaluated with all the other facts and circumstances of the situation. Some factors that should be taken into consideration include, but are not limited to:

• If the organization may reasonably be expected to continue to generate significant public support in the future,
• If the organization was able to meet the public support test prior to receiving the grant or bequest,
• Who the contribution was made by and what their relationship is to the organization, and,
• If the contribution was in the form of cash, marketable securities, or other assets that further the purposes of the organization’s tax-exempt mission.

The benefit to the public charity is that the unusual grant can be excluded from the numerator and denominator of the public support calculation, if after considering all the facts and circumstances, the organization arrives at the conclusion that a grant meets the qualifications discussed above. The IRS issued a private letter ruling on this topic (PLR 202313010). Public charities should consider seeking an unusual grant PLR determination, especially if the unusual grant is significant and due to a unique situation or transaction.

The IRS considers the following facts and circumstances when applying the guidance under Treas. Reg. Section 1.170A-9(f)(6)(iii):

• Organization will receive a grant that significantly passes its annual budget,
• It is unexpected and the organization was not aware of the opportunity for the grant,
• If the grant will be made in cash,
• Grantor does not have authority over the organization and is not one of the creators of the organization, and
• The grant requires the organization to use the grant for purposes in accordance with the organization’s bylaws.

Based on the consideration of the facts and circumstances, IRS ruled in the 2023 PLR that the grant did meet the requirements of Treas. Reg. Section 1.170A-9(f)(6)(iii) and was considered an unusual grant confirming that the organization can exclude from the public support calculation. This helps prevent the organization from tipping to a private foundation. There are some situations where the law requires notifying the IRS or receive advanced determination before entering into certain transactions that have tax implications. The treatment of an unusual grant under Treas. Reg. Section 1.170A-9(f)(6)(iii) is one of these situations.

Do you have questions about a grant your organization received? We may be able to help!

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