## Facts

- The Internal Revenue Service issued an administrative procedure addressing how certain grants or contributions to publicly supported charities are treated under the public support rules.
- The procedure applies to organizations described in I.R.C. § 170(b)(1)(A)(vi) and § 509(a)(2), and to their grantors and contributors (including private foundations).
- Donors may generally rely on an organization’s public charity classification until the IRS publishes notice of loss of that classification.
- Donor reliance is limited where the donor is responsible for, or aware of, a “substantial and material” change in the organization’s sources of support that results in loss of public charity classification.
- An unusually large contribution that does not qualify as an “unusual grant” can distort public support computations, potentially causing loss of public charity status and adverse donor consequences (including private foundation taxable expenditure exposure if expenditure responsibility is not met).
- The procedure states guidelines under which certain large grants will be treated as “unusual grants” without requiring an advance ruling.

## Issues

1. Under what conditions will a large grant or contribution to a § 170(b)(1)(A)(vi) or § 509(a)(2) organization be treated as an “unusual grant” for public support purposes without an advance ruling?
2. When will a grantor or contributor be assured that the grant will not cause the grantor or contributor to be treated as responsible for a “substantial and material” change in the organization’s sources of support?

## Decision

- The IRS provided that a grant or contribution will be treated as an “unusual grant” if it has specified characteristics derived from Treas. Reg. § 1.509(a)-3(c)(4) and, by reason of its size, would otherwise adversely affect the organization’s status under § 170(b)(1)(A)(vi) or § 509(a)(2).
- The procedure identifies donor-relationship limits as key characteristics, including that the grant is not made by (and does not confer creator-like or substantial-contributor-like rights on) an organization’s creator, a prior substantial contributor, or certain related persons.
- The guidelines are intended to give advance assurance that qualifying grants will be excluded from public support computations as unusual grants and that donors will not be treated as responsible for disqualifying shifts in support sources.

## Legal Principles

- Public charity classification may generally be relied upon by donors until published notice of loss of classification, but not when the donor is responsible for or aware of a substantial and material change in sources of support that leads to reclassification.
- A single large gift can create a substantial and material change in support sources if it does not qualify as an “unusual grant,” potentially affecting both organizational status and donor tax treatment.
- A grant meeting the procedure’s enumerated characteristics (drawn from Treas. Reg. § 1.509(a)-3(c)(4)) is treated as an “unusual grant” when its size would otherwise adversely affect public charity status under § 170(b)(1)(A)(vi) or § 509(a)(2).
- Characteristics central to unusual-grant treatment include that the grant is not from insiders (creators, prior substantial contributors, or certain related persons) and does not result in the donor obtaining comparable rights or powers over the organization.
- Treating a qualifying gift as an unusual grant removes it from the public support computation to prevent distortion from extraordinary, non-recurring contributions.

## Conclusion

The procedure establishes a safe-harbor framework for determining when an exceptionally large contribution to certain publicly supported charities will be treated as an “unusual grant” without an advance ruling, thereby protecting the organization’s public charity classification and reducing donor risk associated with substantial and material changes in the organization’s support sources.


Rev. Proc. 81-7, 1981-1 C.B. 621 (1981)