SECTION 7. SAFE HARBORS — Internal Revenue Bulletin 2018-23

GRANTORS AND CONTRIBUTORS WHEN AN ORGANIZATION LOSES ITS PUBLIC CHARITY STATUS

.01 Aggregate Support Safe Harbor .

(1) For purposes of section 5.02 of this revenue procedure, grantors and contributors will not be considered responsible for, or aware of, an act that results in the loss of classification due to a change in financial support if the aggregate of grants or contributions received from such grantor or contributor for the taxable year of the recipient organization in which the grant or contribution is received is 25 percent or less of the aggregate support, as defined in section 7.01(2) or section 7.01(3) of this revenue procedure, received by the recipient organization for the four taxable years immediately preceding such taxable year. If a grant or contribution is made during the first four and one-half months of the recipient organization’s taxable year, the computation period may consist of the four taxable years immediately preceding such taxable year or the four taxable years immediately preceding the prior taxable year.

(2) For purposes of section 7.01(1) of this revenue procedure, in computing aggregate support for publicly supported organizations described in § 170(b)(1)(A) (vi), the term “support” has the same meaning as for purposes of § 1.170A– 9(f)(7), except that it does not include any support provided by the grantor or con

tributor (or disqualified persons with respect to the grantor or contributor).

(3) For purposes of section 7.01(1) of this revenue procedure, in computing aggregate support for publicly supported organizations described in § 509(a)(2), the term “support” has the same meaning as in § 509(d), except that it does not include any support provided by the grantor or contributor (or disqualified persons with respect to the grantor or contributor).

(4) The safe harbor provided in section 7.01 of this revenue procedure is not available to a grantor or contributor who is in a position of authority (such as a foundation manager within the meaning of § 4946(b)) with respect to the recipient organization (or who otherwise has the ability to exercise control over the recipient organization), or to a person who is standing in a relationship described in § 4946(a)(1)(C)–(G) with respect to such person who is in a position of authority or control. Similarly, the exclusion is not available to a person who obtains a position of authority with respect to the recipient organization (or who otherwise gains the ability to exercise control over the recipient organization), as a consequence of the grant or contribution, or to a person who will be standing in a relationship described in § 4946(a)(1)(C)–(G) with respect to such person who is in a position of authority or control.

(5) The safe harbor provision in section 7.01 of this revenue procedure is not applicable if the grantor or contributor has actual knowledge of the loss of classification of public charity status or after the date of a public announcement that the organization ceases to qualify as a public charity.

(6) The following examples illustrate the application of section 7.01 of this revenue procedure:

(a) Example 1: B was determined by the IRS in 2002 to be a § 509(a)(2) public charity and received total support of $340,000 in 2014 through 2017. B is a calendar year taxpayer. X, an individual, is considering making a grant of $30,000 to the organization in June 2018. X contributed $40,000 of the $340,000 of total support B received during the four-year period 2014–2017. Accordingly, B’s aggregate support (as defined in section 7.01(3) of this revenue procedure) is

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$300,000. Because X’s grant of $30,000 in 2018 is only 10 percent of B’s aggregate support during the four years immediately preceding 2018, X’s grant will not

cause X to be considered to be responsible for an act that results in B’s loss of public charity status, even if B is later deter

mined to be a private foundation for its 2018 taxable year. The computations are as follows:

Support received by B during the four-year computation period (2014–2017) $340,000

Less: Support provided by X during the four-year computation period (2014–2017) ($40,000)

Aggregate support (as defined in section 7.01(3) of this revenue procedure) received by B $300,000 during the four-year computation period

Support provided by X during the 2018 tax year, divided by aggregate support (as defined in section 7.01(3) of this revenue procedure) received by B during the four-year computation period

$30,000 $300,000

(b) Example 2: C was determined by the IRS in 2000 to be a § 509(a)(2) public charity. C is a calendar year taxpayer. Y, an individual, plans to make a $75,000 grant to C in early January 2018. C received total aggregate support in the amount of $320,000 during the four-year period 2013–2016. Y contributed $20,000 of the $320,000 of total support received by C during the four-year period 2013– 2016. As of December 31, 2017, C estimated its total support for 2014–2017 to be $340,000. However, because C has not closed its books for 2017, C has not yet finally determined its total support for 2014–2017. Y contributed $60,000 to C during the four-year period 2014–2017.

Because Y’s grant will be made in the first four and one-half months of C’s taxable year, Y may use either the four-year computation period 2014–2017 or the four taxable years preceding the taxable year prior to the year of the grant (2013– 2016). If Y elects the four-year computation period 2014–2017 and makes a grant in January 2018, Y would not know the amount of aggregate support (as defined in section 7.01(3) of this revenue procedure) that C received during the four-year period 2014–2017. If C’s total support for 2014–2017 did not equal or exceed $360,000, Y’s contribution of $75,000 would exceed 25 percent of C’s aggregate support during the four-year computation period 2014–2017.

If, however, Y elects to use the fouryear period consisting of 2013–2016, because Y’s grant of $75,000 in 2018 is 25 percent of C’s aggregate support (as defined in section 7.01(3) of this revenue procedure) during the four-year computation period 2013–2016, Y will be deemed not to be responsible for an act that results in C’s loss of public charity status, even if C is later determined to be a private foundation for its 2018 taxable year.

If Y uses the 2014–2017 four-year computation period, the computations are as follows (assuming the estimates are the actual support):

Support received as of December 31, 2017, by C during the four-year computation period (2014–2017) $340,000

Less: Support provided by Y during the four-year computation period (2014–2017) ($60,000)

Aggregate support (as defined in section 7.01(3) of this revenue procedure) received as of $280,000 December 31, 2017, by C during the four-year computation period

Support provided by Y during the 2018 tax year, divided by aggregate support (as defined in section 7.01(3) of this revenue procedure) received as of December 31, 2017, by C during the four-year computation period. This amount exceeds the safe harbor maximum of 25 percent in section 7.01(1).

If Y uses the 2013–2016 four-year computation period, the computations are as follows:

$75,000 $280,000

26.8 %

Support received by C during the four-year computation period (2013–2016) $320,000

Less: Support provided by Y during the four-year computation period (2013–2016) ($20,000)

Aggregate support (as defined in section 7.01(3) of this revenue procedure) received by C during the $300,000 four-year computation period

Support provided by Y during the 2018 tax year, divided by aggregate support (as defined in section 7.01(3) of this revenue procedure) received by C during the four-year computation period

$75,000 $300,000

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.02 Additional Safe Harbor for Private Foundation Grantors and Contributors .

(1) For purposes of section 5.02 of this revenue procedure, private foundation grantors or contributors will not be considered responsible for, or aware of, an act that results in a recipient organization’s loss of classification as a public charity due to a change in financial support if the recipient organization has received a determination letter or ruling that it is described in §§ 170(b)(1)(A)(vi) and 509(a) (1) or in § 509(a)(2) and the recipient organization is not controlled directly or indirectly by the private foundation.

(2) For purposes of section 7.02(1) of this revenue procedure, a recipient organization is controlled, directly or indirectly, by a private foundation if the private foundation and disqualified persons with respect to the private foundation, by aggregating their votes or positions of authority, may require the recipient organization to perform any act that significantly affects its operations or may prevent the recipient organization from performing such an act.

(3) The safe harbor in section 7.02 of this revenue procedure is not applicable if the private foundation grantor or contributor has actual knowledge of the loss of classification of public charity status or after the date of a public announcement that the organization ceases to qualify as a public charity.

.03 Safe Harbor for “Unusual Grants .”

(1) For purposes of §§ 1.170A– 9(f)(6)(ii) and 1.509(a)–3(c)(3), a grant or contribution with all of the characteristics described in this section 7.03(1) ( see § 1.509(a)–3(c)(4)) will be considered an unusual grant.

(a) By reason of its size, the grant or contribution would adversely affect the status of a recipient organization under §§ 170(b)(1)(A)(vi) and 509(a)(1) or under § 509(a)(2), absent its treatment as an “unusual grant” under §§ 1.170A–9(f)(6)(ii) and 1.509(a)–3(c)(3).

(b) The grant or contribution is not made by a person who created the organization or by a person who was a substantial contributor (within the meaning of § 507(d) (2)) to the organization prior to the grant or contribution (or by a person standing in a

relationship described in § 4946(a)(1)(C) through (G) to either person).

(c) The grant or contribution is not made by a person who is in a position of authority with respect to the organization (such as a foundation manager within the meaning of § 4946(b)), by a person who otherwise has the ability to exercise control over the recipient organization, or by a person standing in a relationship described in § 4946(a)(1)(C) through (G) to any person who is in a position of authority or control. Similarly, the grant or contribution is not made by a person who, as a consequence of the grant or contribution, becomes a person of authority with respect to the organization, a person who otherwise gains the ability to exercise control over the organization, or a person who will be standing in a relationship described in § 4946(a)(1)(C) through (G) to any person who is in a position of authority or control.

(d) The grant or contribution is in the form of cash, readily marketable securities, or assets that directly further the exempt purpose of the organization, such as a contribution of a painting to a museum.

(e) The recipient organization has received a final determination letter or ruling classifying it as an organization described in §§ 170(b)(1)(A)(vi) and 509(a)(1) or in § 509(a)(2) and the organization is actively engaged in a program of activities in furtherance of its exempt purpose.

(f) The grantor or contributor has not imposed material restrictions or conditions (within the meaning of § 1.507– 2(a)(7)) upon the organization in connection with the grant or contribution.

(g) The terms and amount of the grant or contribution are expressly limited to underwriting no more than one year’s operating expenses, if the grant or contribution is intended to underwrite operating expenses, and the grant or contribution is not used to finance capital items.

(2) A grant or contribution would adversely affect the status of an organization under §§ 170(b)(1)(A)(vi) and 509(a)(1) or under § 509(a)(2) for purposes of section 7.03(1) of this revenue procedure only if the organization otherwise meets the support test described in §§ 170(b)(1) (A)(vi) and 509(a)(1) or in § 509(a)(2) in the year being tested without taking into

account the grant or contribution. The year being tested is the year for which satisfaction of one of the public support tests is being determined, and for this purpose, that year’s public support is calculated based upon the aggregate public support received during the four prior taxable years and the current (or tested) taxable year. A grant or contribution does not satisfy the requirements of the safe harbor in section 7.03(1) of this revenue procedure if it is made to an organization that would fail to satisfy the public support test regardless of whether the grant or contribution at issue were made.

(3) A potential recipient organization may request a determination letter under Rev. Proc. 2018–5, and any successor revenue procedure, concerning whether a proposed grant or contribution that does or does not satisfy the requirements of the safe harbor in section 7.03(1) of this revenue procedure will constitute an unusual grant, as provided for in §§ 1.509(a)– 3(c)(5) and 1.170A–9(f)(6)(iv). (4) The following examples illustrate the application of section 7.03 of this revenue procedure.

(a) Example 1: During the years 2013– 2017, D, an organization described in § 509(a)(2), received aggregate support of $350,000. Of this amount, $105,000 was received from grants, contributions and receipts from admissions that are described in § 509(a)(2)(A)(i) and (ii). An additional $150,000 was received from grants and contributions from substantial contributors within the meaning of § 507(d)(2) (who are disqualified persons with respect to the recipient organization). The remaining $95,000 was gross investment income as defined in § 509(e).

Included in the contributions from substantial contributors and disqualified persons was a contribution of $50,000 from Z. Z was not the creator of or a substantial contributor to the organization prior to the making of this contribution (or a person standing in a relationship described in § 4946(a)(1)(C) through (G) to any such person.) Z is also not in a position of authority with respect to the organization (or a person standing in a relationship described in § 4946(a)(1)(C) through (G)). In addition, all of the other requirements of section 7.03(1) of this revenue procedure were met with respect to Z’s contri

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bution. If Z’s contribution is excluded from D’s support by reason of the fact that it is an unusual grant, D will have received, for the years 2013–2017, $105,000 from sources described in § 509(a)(2)(A)(i) and (ii), $100,000 in grants and contributions from disqualified persons, and $95,000 in gross investment income. Therefore, if Z’s contribution is excluded from D’s support, D meets the requirements of the § 509(a)(2) support test for the year 2017 because more than one-third of its support is from sources described in § 509(a)(2)(A)(i) and (ii) and

no more than one-third of its support is gross investment income. Z’s contribution would adversely affect the status of D under section 7.03(2) of this revenue procedure absent its treatment as an “unusual grant” because the organization otherwise meets the support test described in § 509(a)(2) in the year being tested without the benefit of the grant or contribution. The grant or contribution from Z would cause the organization to fail to satisfy the support test described in § 509(a)(2) if it was not treated as an unusual grant.

Because the requirements of section 7.03(1) of this revenue procedure are satisfied, the contribution is excludable as an unusual grant for purposes of §§ 1.170A– 9(f)(6)(ii) and 1.509(a)–3(c)(3). Thus, Z’s contribution of $50,000 will not be considered an act for which Z is responsible that results in A’s loss of classification under § 509(a)(2).

The computations showing the effect of excluding Z’s contribution from D’s support are as follows:

Aggregate support received by D during the tax years from 2013 through 2017 $350,000

Less: contribution from Z ($50,000)

Aggregate support of D less contribution from Z $300,000

Gross investment income received by D as a percentage of aggregate support of D less contribution from Z

Grants, contributions, and receipts from admissions described in § 509(a)(2)(i) and (ii) received by D as a percentage of aggregate support of D less contribution from Z

$95,000/ $300,000

31.67%

$105,000/

$300,000

(b) Example 2: Assume the same facts as in Example 1, except that for the years 2013–2017, D received $100,000 (instead of $150,000) from grants or contributions from substantial contributors and disqualified persons. In this case, if Z’s contribution is excluded as an unusual grant, D will have received $105,000 from sources that are described in § 509(a)(2)(A)(i) and (ii), $50,000 in grants and contributions from disqualified persons, and $95,000 in

gross investment income. If Z’s contribution is excluded from D’s support, D will have received more than one-third of its support from gross investment income and D would not meet the requirements of the § 509(a)(2) support test for the year 2017. Thus, even though all of the requirements of section 7.03(1) of this revenue procedure would otherwise be satisfied with respect to Z’s contribution, under section 7.03(2) of this revenue pro

cedure, the contribution does not satisfy the requirements of the safe harbor in section 7.03(1) of this revenue procedure and it is not excludable as an unusual grant because D would still not meet the support tests described in §§ 170(b)(1)(A)(vi) and 509(a)(1) or in § 509(a)(2) even if Z’s contribution was excluded.

The computations showing the effect of excluding Z’s contribution from D’s support are as follows:

Aggregate support received by D during the tax years 2013 through 2017 $300,000

Less: contribution from Z ($50,000)

Aggregate support of D less contribution from Z $250,000

Gross investment income received by D as a percentage of aggregate support of less contribution from Z

$95,000/ $250,000

(2) The grantor or contributor retains a paper or electronic copy of the report.