Decisions — P.S. Not the usual grant

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To maintain status as a public charity, one of the requirements nonprofit organizations must meet is the “public support test.” Public support tests are mechanical. To pass, an organization has to receive at least one-third of its support from contributions from the general public or meet a 10% facts and circumstances test, or receive more than one-third of its support from contributions from the general public and/or from gross receipts from activities related to its tax-exempt purposes. Under the second test, an organization can receive no more than one-third of its support from gross investment income and unrelated business taxable income.

Nonprofits that fail the support test may be reclassified as a private foundation and be subject to more restrictive tax rules, such as excise taxes and potentially less favorable tax treatment for contributions.

So what’s a nonprofit to do if a donor wants to make a large contribution that will cause the organization to fail the public support test? For these “unusual” grants, the nonprofit can request a private letter ruling from the IRS prior to accepting the funds. If the ruling is favorable, the nonprofit can exclude the grant from the public support test.

In private letter ruling 201621015, the requestor of the ruling, a public charity with a mission to provide high impact educational programs and opportunities to children, youths, and their families, received a one-time grant. The grant was in the form of cash and readily marketable securities, and was not a bequest nor a transfer in trust, and the grantor did not put any material restrictions or conditions on the nonprofit.

Under the guidance of an annually-elected board of directors, the nonprofit operated three preschools and a college program for teens and adults. The grant money would allow the nonprofit to expand and enhance existing programs for low-income working and military families, and to establish a new afterschool and summer program for adolescents and teens.

In past years, the nonprofit received nearly 25% of its annual operating budget from public support consisting of more than 20 individuals, foundations, and corporate donors, and met the one-third support test. The support was raised through a combination of special events, direct mail appeals, and grants.

Here are the factors the IRS considered when deciding if the grant met the criteria for exclusion as an unusual grant (see treasury regulation 1.509(a)-3(c)(4)).

Source: Internal Revenue Manual

Source: Internal Revenue Manual


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The grant meets the criteria for exclusion under treasury regulation 1.170A-9(f)(6)(ii) and 1.509(a)-3(c)(4) based on the facts and circumstances since the grant was not made by a disqualified persona, was neither a bequest nor an intervivos transfer, and was in the form of cash and readily marketable securities.

Also, prior to the receipt of the grant, 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. You expect to attract a significant amount of public support after the particular contribution.

Prior to the year in which the grant will be received, you met the one-third support test without the benefit of any exclusions of unusual grants. You have a representative governing body and no material restrictions or conditions have been imposed by the transferor upon the transferee in connection with such transfer.

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