Public Support Tests- Unusual Grants

An organization exempt under IRC 501(c)(3) may qualify as a public charity if (1) it normally receives one-third of its TOTAL SUPPORT from sources that qualify as PUBLIC SUPPORT (One-Third Support Test); or (2) it meets the Facts and Circumstances Test, including the Ten-Percent-of-Support Requirement.

PUBLIC SUPPORT includes:

  • Direct or indirect contributions from the general public, including contributions from an individual, trust or corporation, but only to the extent that the total contributions from such individual, trust or corporation, during the 4-year period immediately before the current tax year (or substituted computation period) are not more than 2% of the organization’s TOTAL SUPPORT for the same period.

Unusual grants.  In applying the 2% limit to determine whether (1) the One-Third Support Test or (2) the Ten-Percent-of-Support Requirement of the Facts and Circumstances Test is met, unusual grants are excluded from both the numerator and denominator of the appropriate percent-of-support fraction.  Generally, unusual grants are substantial contributions or bequests from disinterested parties if the contributions:

  1. Are attracted by the publicly-supported nature of the organization,
  2. Are unusual or unexpected in amount, and
  3. Would adversely affect, because of the size, the status of the organization as normally being publicly supported.  (The organization must otherwise meet the support test in that year without benefit of the grant or contribution.)

For a grant that meets the requirements for exclusion, if the terms of the granting instrument require that the funds be paid to the recipient organization over a period of years, the amount received by the organization each year under the terms of the grant may be excluded for that year.  However, no item of gross investment income (gross amount of income from interest, dividends, payments with respect to securities loans, rents, and royalties, but it does not include any income that would be included in computing tax on unrelated business income from trades or businesses) may be excluded under this rule.  These provisions allow exclusion of unusual grants made during any of the applicable periods.

Characteristics of an unusual grant.  A grant will be considered an unusual grant if the above three factors apply and if it has all of the following characteristics.  If these factors and characteristics apply, then even without the benefit of an advance ruling, grantors or contributors have assurance that they will not be considered responsible for substantial and material changes in the organization’s sources of support.

  1. The grant or contribution is not made by a person (or related person) who created the organization or was a substantial contributor to the organization before the grant or contribution.
  2. The grant or contribution is not made by a person (or related person) who is in a position of authority, such as a foundation manager, or who otherwise has the ability to exercise control over the organization.  Similarly, the grant or contribution is not made by a person (or related person) who, because of the grant or contribution, obtains a position of authority or the ability to otherwise exercise control over the organization.
  3. The grant or contribution is in form of cash, readily marketable securities, or assets that directly further the organization’s exempt purposes, such as a gift of a painting to a museum.
  4. The donee-organization has received either an advance or final ruling or determination letter classifying it as a publicly-supported organization and, except for an organization operating under an advance ruling or determination letter, the organization is actively engaged in a program of activities in furtherance of its exempt purpose.
  5. No material restrictions or conditions have been imposed by the grantor or contributor upon the organization in connection with the grant or contribution.
  6. If the grant or contribution is intended for operating expenses, rather than capital items, the terms and amount of the grant or contribution are expressly limited to one year’s operating expenses.

One thought on “Public Support Tests- Unusual Grants

  1. If an organization classifies a grant as unusual in one tax year (e.g., 2005), can the organization change this classification in future tax years when computing its public support test?
    For example, in 2008 the organization might determine that the 2005 grant isn’t so unusual because the dollar amount that appeared large in 2005 isn’t so large in 2008, when compared to other donation amounts received since 2005.

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