A question about “tipping” came to our attention recently via the Council on Foundation’s Philanthropy Exchange network, which provided us with another opportunity to get the word out about due diligence myths.
We are currently in discussions about a large grant from a funder who is raising concerns about our public support test. Essentially, they are saying that they will need to lower the amount they can give us because it may take us past a threshold.
No one has raised this issue before. While the test is low (about 35%) for us, it does not cause the IRS any issues, so I am not sure why the funder is [considering this in their decision about our grant].
Does anyone have experience in dealing with this question?”
Private foundations are understandably concerned that their funding not jeopardize a nonprofit organization’s standing as a public charity by “tipping” the organization over into qualifying as a private foundation. But here is something interesting. It’s not the responsibility of the funder to keep track of the public support percentage for an organization. As Project Streamline wrote in our Guide to Due-Diligence (PDF) some years ago,
It’s a conscientious gesture to ensure you aren’t “tipping” your grantee with a grant that dominates their budget. But it’s not your job. The Council on Foundations obtained a ruling for the field in 1989 that clarified that this is the grantee’s responsibility.
Before this ruling (Rev. Proc. 89-23), Treasury regulations stated that a private foundation could be held responsible if its grant to a public charity transformed a public charity into a private foundation by virtue of the grant’s size relative to the organization’s other contributions. To avoid tipping a public charity, foundation financial officers and outside counsel reviewed grantees’ finances and public support calculations. If the public charity was “tipped,” the private foundation would be required to treat the tipping grant as a grant to another private foundation, exercise expenditure responsibility, and make sure that all other rules were satisfied.
This is no longer the case. The ruling (Rev. Proc. 89-23) states that a foundation can’t be penalized for tipping a grantee as long as: (1) the grantee has a valid IRS determination of public charity status at the time the grant is made; (2) the IRS has not revoked the status and the foundation is not aware of imminent action by the IRS to do so; and (3) the foundation does not control the grantee.
In addition, the IRS understands that public charities can receive “unusual” grants and allows them to be excluded them from the public support calculation. The IRS defines “unusual” grants as follows:
“Unusual grants generally are substantial contributions and bequests from disinterested persons and are:
- Attracted because of the organization’s publicly supported nature,
- Unusual and unexpected because of the amount, and
- Large enough to endanger the organization’s status as normally meeting either the 33 1/3% public support test or the 10% facts and circumstances test.
For a list of other factors to be considered in determining whether a grant is an unusual grant, see Regulations section 1.509(a)-3(c)(4).”
As with all compliance-related policies and practices, you should consult legal counsel as you consider implementing or changing practice.
So funders, there you go! You don’t need to police this for your grantees – they are responsible for keeping themselves in compliance. One more item off of your “to do” list!
To support your grantees and grantseekers, here are some useful resources that might help them in understanding the public support test, and particularly this exclusion for unusual grants.
- IRS.gov: Publicly Supported Charities
- Nonprofit Law Blog: Public Support Tests, Part 1 and Part 2.
- GrantSpace (a service of the Foundation Center): What is the Public Support Test?
- Recent Private Letter Ruling on a similar situation to the one described above.
 Gifts from community foundations, other public funders, and collective giving funds can’t tip a nonprofit because the funds themselves are classified as public charities. http://www.rbh.com/tipping-12-15-2012/  Instructions for Schedule A (Form 990 or 990EZ). 2014. Internal Revenue Service