Q&A #69 – Can a grant from a previous grantor be treated as an unusual grant?

Question: A private foundation has expressed interest in making a large grant to our nonprofit, which is a 501(c)(3) public charity. We are concerned that this grant could cause us to tip into private foundation status, so we are looking into whether it is possible to treat this as an “unusual grant.” This particular foundation has made grants to us in the past, but none this large. Does the fact that this foundation has made previous grants disqualify the grant from unusual grant treatment?

Answer: Large grants are usually a reason to celebrate, but some grants are so large that they pose significant problems for an organization’s public support tests. The ability to exclude “unusual grants” from the public support test can be extremely helpful in these situations. The fact that a grantor or funder has made contributions in the past is a significant factor weighing against unusual grant treatment, but this by itself is not necessarily disqualifying.

Section 1.509(a)-3(c)(4) of the Treasury Regulations lists nine different factors that are considered when determining whether “unusual grant” treatment may apply. While these regulations state that “no single factor will necessarily be determinative,” the IRS private letter rulings on this issue suggest that a grantor’s prior history of making contributions to the organization is one of the most important factors (if not the most important). A grant tends to look less “unusual” if it could be expected based on a pre-existing funding relationship.

In your case, it may be possible to treat the grant as an unusual grant if the past grants from this foundation were much smaller in size. Other factors that could be helpful include whether your organization has maintained active efforts to solicit contributions from the public, whether the organization has a history of passing its public support tests without relying on the unusual grant exclusion, whether the composition of organization’s Board shows that it “represents the broad interests of the public, rather than the personal or private interests of a limited number of donors,” and whether the grant at issue is free of material restrictions or conditions.

Ultimately, however, the question of whether a grant qualifies as an “unusual grant” is based on all the facts and circumstances. Consequently, this is an inherently gray area that usually does not yield clear answers. It is important to explore and document all the facts and circumstances before you agree to accept the large grant, and it is highly recommended to seek advice from a qualified tax professional on this issue.

Planning Tip – Any grantor that trusts your organization enough to make a very large grant should be amenable to discussions about the effects the grant may have on your public support tests. Communicate your concerns to the grantor early in the process, make thoughtful projections about your public support test calculations using a variety of scenarios, and explore whether the grantor would be willing to restructure the grant in a way that is more favorable for your public support tests.

Lastly, remember that there are other possible protections against “tipping” into private foundation status besides the “unusual grant” exclusion. Organizations that use the Section 509(a)(1) / 170(b)(1)(A)(vi) test can pass with as little as 10% public support under certain circumstances if the usual 1/3 public support cannot be attained. And an organization will not be reclassified as a private foundation until it has failed the public support tests for 2 consecutive years. In a lot of cases, these additional safety valves provide ample time to plan around potential public support test hurdles.

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