In a prior blog post I discussed the One-Third Support Test and the Facts and Circumstances Test criteria for public charities in determining whether an Organization is publicly supported. This blog post discusses a key component of the public support test: the definition of “support.” Click here for a visual chart summarizing this blog post.

  1. What is Support?
  • Support. The following includes, but is not limited to the definition of “support.” Under some circumstances, the following may not always be considered “Qualifying Support” (defined below under Section B):
  • Gifts, grants, contributions or membership fees (if membership fees are paid to provide support for the Organization and not to buy admissions, merchandise, services or the use of facilities);
  • Net income from unrelated business activities (whether or not carried on regularly as a trade or business);
  • Gross investment income;
  • Tax revenues levied for the benefit of the Organization and either paid to or spent on behalf of the Organization;
  • The value of services or facilities furnished by a governmental unit to the Organization without charge (except services or facilities generally furnished to the public without charge); and
  • Any amounts received from a governmental unit (unless amounts are received from the exercise or performance of the Organization’s exempt functions to the direct benefit of that governmental unit).
  • Non-support. The following should be excluded from both the numerator and the denominator when calculating support:
  • Any amount received from the exercise or performance by the Organization of the purpose or function constituting the basis for its exemption (e.g. ticket sales for concerts or entrance fees to museum exhibit). In general, these excluded amounts include amounts received from any activity the conduct of which is substantially related to the furtherance of the exempt purpose or function, other than through the production of income, and
  • Contributions of amounts or services for which a deduction is not allowed. Generally, if a contribution is of equal value to a service provided in exchange, that contribution is not deductible and therefore does not countable toward the Organization’s support2. Limit on Qualifying Support. “Qualifying Support” is support that may be included in the numerator of the public support calculation. When calculating Qualifying Support in the One Third Support Test and the Facts and Circumstances Test (see prior blog post), contributions from an individual, trust or business may be included in the numerator but only up to two percent (2%) of the Organization’s total support for the tax year. The entire contribution will be included in the denominator as total support. In applying the two percent limit, all contributions made by the donor and any person in a special relationship to the donor (certain disqualified persons, including trusts and businesses) are considered made by the same person. This two percent limit generally does not apply to support received from governmental units or to contributions from other publicly supported organizations (charities).3. Unusual Grants. Unusual grants can be beneficial to the Organization because they are excluded from both the numerator and denominator when calculating support. Unusual grants may otherwise cause the Organization to fail the public support calculation. The Organization may request an advance ruling by the IRS to determine whether a prospective contribution may be treated as an unusual grant. “Unusual Grants” are substantial contributions from disinterested parties if the contributions satisfy the following criteria:
  • 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 requirement in that year without the benefit of the grant or contribution.)
  • Additional Factors
  • 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 Organization has received a final ruling or determination letter classifying it as a publicly supported organization, and 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.

Satisfaction of all of the above criteria creates a safe harbor for donors such that even without the benefit of an advance ruling, donors have assurance that they will not be considered responsible for substantial and material changes in the Organization’s sources of support unless they had knowledge that their donation would not qualify as an unusual grant.

The Organization should frequently refer to the IRS’ public support guidelines and consult with a qualified attorney and qualified tax advisors, especially where the Organization seeks to attract large donations (in comparison to the Organization’s annual budget). In a future blog post, I will provide some specific examples to calculate public support.

These materials have been prepared by Rudman Winchell for educational purposes only.  They should not be considered legal advice. The transmission of this information to you is not intended to create a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel.  You should not send any confidential or private information to Rudman Winchell until a formal attorney-client relationship has been established, in writing.

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