Unusual grants.
In applying the 2% limit to determine whether the one-third support
test or the ten-percent-of-support requirement is met, exclude
contributions that are considered unusual grants 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:
- Are attracted by the publicly-supported nature of the
organization,
- Are unusual or unexpected in amount, and
- 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 (see the description of Grants on page
37) 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 (defined
under Section 509(a)(2) Organizations, later) may be
excluded under this rule. These provisions allow exclusion of unusual
grants made during any of the applicable periods previously discussed
under Special computation period for new organizations and
to periods described in Advance rulings to newly created
organizations - Initial determination of status, later.
Characteristics of an unusual grant.
A grant or contribution 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.
- 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.
- 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.
- The grant or contribution is in the 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.
- 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.
- No material restrictions or conditions have been imposed by
the grantor or contributor upon the organization in connection with
the grant or contribution.
- 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.
Ruling request.
Before any grant or contribution is made, a potential grantee
organization may request a ruling as to whether the grant or
contribution may be excluded. This request may be filed by the grantee
organization with the EO area manager for its area. The organization
must submit all information necessary to make a determination,
including information relating to the factors and characteristics
listed in the preceding paragraphs. If a favorable ruling is issued,
the ruling may be relied upon by the grantor or contributor of the
particular contribution in question. The issuance of the ruling will
be at the sole discretion of the IRS. The potential grantee
organization should follow the procedures set out in Revenue Procedure
2001-4 (or later update) to request a ruling.
Grants and contributions that result in substantial and material
changes in the organization and that fail to qualify for exclusion
will affect the way the support tests are applied. See Exception
for material changes in sources of support, earlier.
If a ruling is requested, in addition to the characteristics listed
earlier under Characteristics of an unusual grant, the
following factors may be considered by the IRS in determining if the
grant or contribution is an unusual grant.
- Whether the contribution was a bequest or a transfer while
living. A bequest will be given more favorable consideration than a
transfer while living.
- Whether, before the receipt of the contribution, the
organization has carried on an active program of public solicitation
and exempt activities and has been able to attract a significant
amount of public support.
- Whether, before the year of contribution, the organization
met the one-third support test without benefit of any exclusions of
unusual grants.
- Whether the organization may reasonably be expected to
attract a significant amount of public support after the 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 support from the general public.
- Whether the organization has a representative governing
body.
Advance rulings to newly created organizations - Initial determination of status.
Many newly created organizations cannot meet either the 4-year
normally publicly supported provisions or the provisions for newly
created organizations to qualify as normally publicly supported
because they have not been in existence long enough. However, a newly
created organization may qualify for an advance ruling that it will be
treated as an organization described in section 170(b)(1)(A)(vi)
during an advance ruling period long enough to enable it to develop an
adequate support history on which to base an initial determination as
to foundation status.
Generally, the type of newly created organization that would
qualify for an advance ruling is one that can show that its
organizational structure, proposed programs and activities, and
intended method of operation are likely to attract the type of broadly
based support from the general public, public charities, and
governmental units that is necessary to meet the public support
requirements discussed earlier, under Qualifying As Publicly
Supported.
An advance ruling or determination will provide that an
organization will be treated as an organization described in section
170(b)(1)(A)(vi) for an advance ruling period of 5 years.
5-year advance ruling period.
A newly created organization may request a ruling or determination
letter that it will be treated as a section 170(b)(1)(A)(vi)
organization for its first 5 tax years. The request must be
accompanied by a consent to extend the statute (on Form 872-C)
that, in effect, states the organization will be subject to the taxes
imposed under section 4940 if it fails to qualify as an organization
excluded as a private foundation during the 5-year advance ruling
period. The organization's first tax year, regardless of length, will
count as the first year in the 5-year period. The advance ruling
period will end on the last day of the organization's 5th tax year.
Between 30 and 45 days before the end of the advance ruling period,
the EO area manager will contact the organization and request the
financial support information necessary to make a final determination
of foundation status. In general, this is the information requested in
Part IV, A of Form 1023.
Failure to obtain advance ruling.
If a newly created organization has not obtained an advance ruling
or determination letter, it cannot rely upon the possibility that it
will meet the public support requirements discussed earlier. Thus, in
order to avoid the risk of being classified as a private foundation,
the organization may comply with the rules governing private
foundations by paying any applicable private foundation taxes. If the
organization later meets the public support requirements for the
applicable period, it will be treated as a section 170(b)(1)(A)(vi)
organization from its inception and any private foundation tax that
was imposed may be refunded.
Reliance period.
The newly created organization will be treated as a
publicly-supported organization for all purposes other than sections
507(d) (relating to total tax benefit resulting from exempt status)
and 4940 (relating to tax on net investment income) for the period
beginning with its inception and ending 90 days after its advance
ruling period expires. The period will be extended until a final
determination is made of an organization's status only if the
organization submits, within the 90-day period, information needed to
determine whether it meets either of the support tests for its advance
ruling period (even if the organization fails to meet either test).
However, this reliance period does not apply to the excise tax imposed
on net investment income. If it is later determined that the
organization was a private foundation from its inception, that excise
tax will be due without regard to the advance ruling or determination
letter. Consequently, if any amount of the tax is not paid on or
before the last date prescribed for payment, the organization is
liable for interest on the tax due for years in the advance ruling
period. However, since any failure to pay the tax during the period is
due to reasonable cause, the penalty imposed for failure to pay the
tax will not apply.
If an advance ruling or determination letter is terminated
by the IRS before the expiration of the reliance period, the status
of grants or contributions with respect to grantors or contributors to
the organization will not be affected until notice of change of status
of the organization is made to the public (such as by publication in
the Internal Revenue Bulletin). However, this will not
apply if the grantor or contributor was responsible for, or aware of,
the act or failure to act that resulted in the organization's loss of
classification as a publicly-supported organization.
Also, it will not apply if the grantor or contributor knew that the
IRS had given notice to the organization that it would be deleted from
this classification. Before any grant or contribution is made, a
potential grantee organization may request a ruling on whether
the grant or contribution may be made without loss of classification
as a publicly-supported organization.
The ruling request may be filed by the grantee organization with
the EO area manager. The issuance of the ruling will be at the sole
discretion of the IRS. The organization must submit all information
necessary to make a determination on the support factors previously
discussed. If a favorable ruling is issued, the ruling may be relied
upon by the grantor or contributor of the particular contribution in
question. The grantee organization also may rely on the ruling for
excluding unusual grants.
Comprehensive Examples
Example 1.
For the years 1995 through 1998, M organization received support of
$600,000 from the following sources.
Investment Income |
$300,000 |
City Y |
40,000 |
United Way |
40,000 |
Contributions |
220,000 |
Total support |
$600,000 |
to have normally received more than one-third of its support from a
governmental unit and from direct and indirect contributions from the
general public computed as follows.
One-third of total support |
$200,000 |
Support from a governmental unit |
$40,000 |
Indirect contributions from the general public (United Way) |
40,000 |
Contributions by various donors (no one having made contributions that total more than $12,000 - 2% of total support) |
50,000 |
Six contributions (each in excess of $12,000 - 2% of total support) 6 × $12,000 |
72,000 |
|
$202,000 |
indirect contributions from the general public normally is more than
one-third of M's total support for the applicable period
(1995-1998), M meets the one-third support test and satisfies
the requirements for classification as a publicly-supported
organization for 1999 and 2000. (This remains in effect if no
substantial and material changes took place in the organization's
character, purposes, methods of operation, or sources of support in
these years.)
Example 2.
N organization was created to maintain public gardens containing
plant specimens and displaying works of art. The facilities, art, and
a large endowment were all contributed by a single contributor. The
members of the governing body of the organization are unrelated to its
creator. The gardens are open to the public without charge and attract
many visitors each year. For the 4 tax years immediately before the
current tax year, 95% of the organization's total support was received
from investment income from its original endowment. N also maintains a
membership society that is supported by members of the general public
who wish to contribute to the upkeep of the gardens by paying a small
annual membership fee. Over the 4-year period in question, these fees
from the general public constituted the remaining 5% of the
organization's total support. Under these circumstances, N does not
meet the one-third support test for its current tax year. Furthermore,
since only 5% was received from the general public, N does not satisfy
the ten-percent-of-support requirement of the facts and circumstances
test. For its current tax year, N therefore is not a
publicly-supported organization. Since N failed to satisfy the
ten-percent-of-support requirement, none of the other requirements or
factors can be considered in determining whether N qualifies as a
publicly-supported organization.
Example 3.
In 1980, O organization was founded in Y City by the members of a
single family to collect, preserve, interpret, and display to the
public important works of art. O is governed by a Board of Trustees
that originally consisted almost entirely of members of the founding
family.
However, since 1990, members of the founding family or persons
related to members of the family have annually been less than 20% of
the Board of Trustees. The remaining board members are citizens of Y
City from a variety of professions and occupations who represent the
interests and views of the people of Y City in the activities carried
on by the organization rather than the personal or private interests
of the founding family.
O solicits contributions from the general public and for each of
its 4 most recent tax years has received total contributions (in small
sums of less than $100, none of which is more than 2% of O's total
support for the period) of more than $10,000. These contributions from
the general public are 25% of the organization's total support for the
4-year period. For this same period, investment income from several
large endowment funds has been 75% of its total support. O spends
substantially all of its annual income for its exempt purposes and
thus depends upon the funds it annually solicits from the public as
well as its investment income to carry out its activities on a normal
and continuing basis and to acquire new works of art. For the entire
period of its existence, O has been open to the public and more than
300,000 people (from Y City and elsewhere) have visited the museum in
each of its 4 most recent tax years.
Under these circumstances, O does not meet the one-third support
test for its current year since it has received only 25% of its total
support for the applicable 4-year period from the general public.
However, O has met the ten-percent-of-support requirement as well as
the attraction of public support requirement and the factors to be
considered, under the facts and circumstances test, in determining
whether an organization is publicly supported. Therefore, O is
classified as a publicly-supported organization for its current tax
year and the next tax year.
Example 4.
In 1990, the P Philharmonic Orchestra was organized in Z City by a
local music society and a local women's club to present to the public
a wide variety of musical programs intended to foster music
appreciation in the community. The orchestra is composed of
professional musicians who are paid by the association. Twelve
performances, open to the public, are scheduled each year. A small
admission charge is made for each of these performances. In addition,
several performances are staged annually without charge.
During its 4 most recent tax years, P received separate
contributions of $200,000 each from Amanda Green and Jackie White (not
members of a single family) and support of $120,000 from the Z
Community Chest, a public federated fundraising organization operating
in Z City. P depends on these funds to carry out its activities and
will continue to depend on contributions of this type to be made in
the future. P has also begun a fundraising campaign in an attempt to
expand its activities for the coming years.
P is governed by a Board of Directors composed of five individuals.
A faculty member of a local college, the president of a local music
society, the head of a local bank, a prominent doctor, and a member of
the governing body of the local Chamber of Commerce currently serve on
the Board and represent the interests and views of the community in
the activities carried on by P.
For P's current tax year, its sources of support are computed on
the basis of the 4 immediately preceding years, as follows.
Contributions |
$520,000 |
Receipts from performances |
100,000 |
|
$620,000 |
Less: |
|
Receipts from performances (excluded, see Support) |
100,000 |
Total support |
$520,000 |
Z Community Chest (indirect support from the general public) |
$120,000 |
Two contributions (each over $10,400 - 2% of total support) 2 × $10,400 |
20,800 |
Total support from general public |
$140,800 |
does not meet the one-third support test ($140,800/$520,000 = 27% of
total support). However, it meets the ten-percent-of-support
requirement. P also meets the requirement of the attraction of public
support. As a result of satisfying these requirements and the public
support factors, P is considered to be a publicly-supported
organization.
If P were a newly created organization, it could obtain a ruling
that it is a publicly-supported organization by reason of its
purposes, organizational structure, and proposed method of operation.
Even if P had initially been founded by the contributions of a few
individuals, this would not, in and of itself, disqualify P from
receiving the ruling.
Example 5.
Q is a philanthropic organization founded in 1985 by Anne Elm for
the purpose of making annual contributions to worthy charities. Anne
created Q as a charitable trust by transferring $500,000 worth of
appreciated securities to Q.
Under the trust agreement, Anne and two other family members are
the sole trustees and are vested with the right to appoint successor
trustees. In each of its 4 most recent tax years, Q received $15,000
in investment income from its original endowment. Each year Q solicits
funds by operating a charity ball at Anne's home. Guests are invited
and asked to make contributions of $100 per couple. During the 4-year
period involved, $15,000 was received from the proceeds of these
events. Anne and the family have also made contributions to Q of
$25,000 over the course of the organization's 4 most recent tax years.
Q makes disbursements each year of substantially all of its net income
to the public charities chosen by the trustees.
For Q's current tax year, Q's sources of support are computed on
the basis of the 4 immediately preceding years as follows.
Investment income |
$60,000 |
Contributions |
40,000 |
Total support |
$100,000 |
Contributions from the general public |
$15,000 |
One contribution (over $2,000 - 2% of total support) 1 × $2,000 |
2,000 |
Total support from general public |
$17,000 |
one-third support test ($17,000/$100,000 = 17% of total support). Even
though it does meet the ten-percent-of-support requirement, its method
of solicitation makes it questionable whether Q satisfies the
attraction of public support requirement. Because of its method of
operating, Q also has a greater burden of establishing its publicly
supported nature under the percentage of financial support factor.
Based on these facts and on Q's failure to receive favorable
consideration under the remaining factors, Q does not qualify as a
publicly-supported organization.
Community Trusts
Community trusts are often established to attract large
contributions of a capital or endowment nature for the benefit of a
particular community or area. Often these contributions come initially
from a small number of donors. While the community trust generally has
a governing body composed of representatives of the particular
community or area, its contributions are often received and maintained
in the form of separate trusts or funds that are subject to varying
degrees of control by the governing body.
To qualify as a publicly-supported organization, a community trust
must meet the one-third support test, explained, earlier, under
Qualifying As Publicly Supported. If it cannot meet that
test, it must be organized and operated so as to attract new and
additional public or governmental support on a continuous basis
sufficient to meet the facts and circumstances test, also explained
earlier. Community trusts are generally able to satisfy the attraction
of public support requirement (as contained in the facts and
circumstances test) if they seek gifts and bequests from a wide range
of potential donors in the community or area served, through banks or
trust companies, through attorneys or other professional persons, or
in other appropriate ways that call attention to the community trust
as a potential recipient of gifts and bequests made for the benefit of
the community or area served. A community trust, however, does not
have to engage in periodic, community-wide, fundraising campaigns
directed toward attracting a large number of small contributions in a
manner similar to campaigns conducted by a community chest or a united
fund.
Separate trusts or funds.
Any community trust may be treated as a single entity, rather than
as an aggregation of separate funds, in which case all qualifying
funds associated with that organization (whether a trust,
not-for-profit corporation, unincorporated association, or a
combination thereof) will be treated as component parts of the
organization.
Single entity.
To be treated as a single entity, a community trust must meet all
of the following requirements.
- The organization must be commonly known as a community
trust, fund, foundation, or other similar name conveying the concept
of a capital or endowment fund to support charitable activities in the
community or area it serves.
- All funds of the organization must be subject to a common
governing instrument (or a master trust or agency agreement) that may
be embodied in a single (or several) document(s) containing common
language.
- The organization must have a common governing body (or
distribution committee) that either directs or, in the case of a fund
designated for specified beneficiaries, monitors the distribution of
all funds exclusively for charitable purposes. The governing body must
have the power in the governing instrument, the instrument of
transfer, the resolutions or bylaws of the governing body, a written
agreement, or otherwise -
- To modify any restriction or condition on the distribution
of funds for any specified charitable purposes or to specified
organizations if in the sole judgment of the governing body (without
the necessity of the approval of any participating trustee, custodian,
or agent), the restriction or condition becomes, in effect,
unnecessary, incapable of fulfillment, or inconsistent with the
charitable needs of the community or area served,
- To replace any participating trustee, custodian, or agent
for breach of fiduciary duty under state law, and
- To replace any participating trustee, etc., for failure to
produce a reasonable return of net income over a reasonable period of
time. (The governing body will determine what is reasonable.)
- The organization must prepare periodic financial reports
treating all of the funds that are held by the community trust, either
directly or in component parts, as funds of the organization.
A community trust can meet the requirement in (3) above even if its
exercise of the powers in (3)(a), (b), or (c) is reviewable by an
appropriate state authority.
Component part.
To be treated as a component part of a community trust (rather than
as a separate trust or a not-for-profit corporation), a trust or fund:
- Must be created by gift, bequest, legacy, devise, or other
transfer to a community trust that is treated as a single entity
(described above), and
- May not be directly subjected by the transferor to any
material restriction or condition with respect to the transferred
assets.
Grantors and contributors.
Grantors, contributors, or distributors to a community trust may
rely on the public charity status, which the organization has claimed
in a timely filed notice, on or before the date the IRS informs the
public (through such means as publication in the Internal Revenue
Bulletin) that such reliance has expired. However, if the
grantor, contributor, or distributor acquires knowledge that the IRS
has notified the community trust that it has failed to establish that
it is a public charity, then reliance on the claimed status expires at
the time such knowledge is acquired.
Section 509(a)(2) Organizations
Section 509(a)(2) excludes certain types of broadly,
publicly-supported organizations from private foundation status.
Generally, an organization described in section 509(a)(2) may also fit
the description of a publicly-supported organization under section
509(a)(1). There are, however, two basic differences.
- For section 509(a)(2) organizations, the term support
includes items of support discussed earlier (under Support,
in the discussion of Section 509(a)(1) Organizations)
and income from activities directly related to their exempt
function. This income is not included in meeting the support test for
a publicly-supported organization under section 509(a)(1).
- Section 509(a)(2) places a limit on the total gross
investment income and unrelated business taxable income (in excess of
the unrelated business tax) an organization may have, while section
509(a)(1) does not.
To be excluded from private foundation treatment under section
509(a)(2), an organization must meet two support tests.
- The one-third support test.
- The not-more-than-one-third support test.
Both these tests are designed to insure that an organization
excluded from private foundation treatment is responsive to the
general public, rather than to the private interests of a limited
number of donors or other persons.
One-third support test.
The one-third support test will be met if an organization
normally receives more than one-third of its
support in each tax year from any combination of:
- Gifts, grants, contributions, or membership fees, and
- Gross receipts from admissions, sales of merchandise,
performance of services, or furnishing facilities in an activity that
is not an unrelated trade or business, subject to certain limits,
discussed below under Limit on gross receipts.
For this purpose, the support must be from permitted sources, which
include:
- Section 509(a)(1) organizations, described earlier,
- Governmental units, described on page 28 under Section
509(a)(1) Organizations, and
- Persons other than Disqualified persons (defined
on page 39 under Section 509(a)(3) Organizations).
Limit on gross receipts.
In computing the amount of support received from gross receipts
under (2) above, gross receipts from related activities received from
any person or from any bureau or similar agency of a governmental unit
are includible in any tax year only to the extent the gross receipts
are not more than the greater of $5,000 or 1% of the organization's
total support in that year.
Not-more-than-one-third support test.
This test will be met if an organization normally
receives no more than one-third of its support in each tax year
from the total of:
- Gross investment income, and
- The excess (if any) of unrelated business taxable income
from unrelated trades or businesses acquired after June 30, 1975 over
the tax imposed on that income.
Gross investment income.
Gross investment income means the 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.
Definition of normally.
Both support tests are computed on the basis of the nature of the
organization's normal sources of support. An organization will be
considered to have normally met both tests for its current tax year
and the tax year immediately following, if it meets those tests on the
basis of the total support received for the 4 tax years immediately
before the current tax year.
Exception for material changes in sources of support.
If during the current tax year there are substantial and material
changes in an organization's sources of support other than changes
arising from unusual grants (discussed, later, under Unusual
grants), neither the 4-year computation period for the current
year as an immediately following tax year, nor the 4-year computation
period for that year as a current tax year applies. Instead, the
normal sources of support will be determined on the basis of a 5-year
period consisting of the current tax year and the 4 preceding tax
years.
For example, if material changes occur in support for the year
1999, then even though the organization meets the requirements of the
support tests based on the years 1994-1997 or 1995-1998,
it does not meet these tests unless it meets the requirements based on
the 5-year computation period of 1995-1999. An example of a
substantial and material change is the receipt of an unusually large
contribution that does not qualify as an unusual grant.
Effect on grantor or contributor.
If an organization is not able to meet either of the support tests
because of a substantial or material change in the sources of support,
its status with respect to a grantor or contributor will not be
affected until notice of a change in status is made to the public
(such as by publication in the Internal Revenue Bulletin).
However, this rule does not apply to any grantor or contributor
who:
- Was responsible for the substantial or material
change,
- Was aware of it, or
- Has acquired knowledge that the IRS gave notice to the
organization that it would no longer be classified as a section
509(a)(2) organization.
A grantor or contributor (other than one of the organization's
founders, creators, or foundation managers) is not considered
responsible for, or aware of, the substantial and material change if
the grantor or contributor made the grant or contribution relying upon
a written statement by the grantee organization that the grant or
contribution would not result in the loss of the organization's
classification as an organization that is not a private foundation.
The statement must be signed by a responsible officer of the grantee
organization and must give enough information, including a summary of
the pertinent financial data for the 4 preceding years, to assure a
reasonably prudent person that the grant or contribution would not
result in the loss of the grantee organization's classification as not
a private foundation. If a reasonable doubt exists as to the effect of
the grant or contribution, or if the grantor or contributor is one of
the organization's founders, creators, or foundation managers, the
grantee organization may request a ruling from its EO area manager for
the protection of the grantor or contributor.
If there is no written statement, a grantor or contributor will not
be considered responsible for a substantial and material change if the
total gifts, grants, or contributions received from that grantor or
contributor for a tax year are 25% or less of the total support
received by the organization from all sources for the 4 tax years
immediately before the tax year. (If the organization has not
qualified as publicly supported for those 5 years, see
Special computation period for new organizations, next.)
For this purpose, total support does not include support received from
that particular grantor or contributor. The grantor or contributor
cannot be a person who is in a position of authority, such as a
foundation manager, or who obtains a position of authority or the
ability to exercise control over the organization because of the grant
or contribution.
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