PLR 200032047: foundation may set aside income for facility expansion

Plain-English summary

A private foundation wanted to reserve income for renovating and expanding its facility. It explained that the project required time to hire contractors, obtain permits, and complete a financial feasibility review, and said it would spend the reserved amounts within 60 months. The IRS approved a set aside of up to the redacted amount under section 4942's suitability test. Those amounts would count as qualifying distributions in the years set aside, rather than when later spent. The foundation must record the set aside as a pledge or obligation and keep the ruling with its records and annual return.

Ruling snapshot

• Question: Can the foundation count income reserved for its renovation and construction project as a qualifying distribution?
• Outcome: Approved, for up to the redacted amount under the suitability test.
• Key authorities: IRC §§ 4942(g)(2)(B)(i), 170(c)(2)(B), 501(c)(3), and 509(a); Treas. Reg. § 53.4942(a)-3(b).

Full text (IRS public release)

200032047
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

Date: MAY 17 2000
Contact Person:
[illegible]
Contact Number:
Uniform Issue List: 4942.03-07

Legend

T =
x =

Dear Applicant:

This is in reply to your ruling request of December 28, 1999. You have requested approval of a proposed set-
aside of your income under the suitability test of section 4942(g)(2)(B)(i) of the Internal Revenue Code and section
53.4942(a)-3(b)(2) of the Foundation and Similar Excise Taxes Regulations.

You, T, are exempt from federal income tax under section 501(c)(3) of the Code and are a private foundation
under section 509(a) of the Code. You propose to set aside x dollars of your income pursuant to section
4942(g)(2)(B)(i) of the Code. Your specific project is the renovation and expansion of your existing facility. You
represent that all of the amounts to be set aside for this specific project will be paid out for this project within 60
months from the time when your first amount of income is set aside. You indicate that the cost of this project can
better be accomplished by the use of a set-aside of your income, rather than by immediate payment of your funds,
because you must hire contractors, secure the necessary permits, and file papers to obtain a financial feasibility
review.

Section 501(c)(3) of the Code provides for the exemption from federal income tax of nonprofit organizations
organized and operated exclusively for charitable and/or other exempt purposes stated in that section.

Section 509(a) of the Code describes organizations exempt from federal income tax under section 501(c)(3) of
the Code that are private foundations subject to the private foundation provisions of Chapter 42 of the Code.

Section 4942 of the Code imposes an excise tax on any private foundation that does not expend qualifying
distributions for exempt purposes at least equal to its distributable amount for its tax year.

Section 4942(g)(1) of the Code provides that, in general, a qualifying distribution is any amount, including
reasonable and necessary administrative expenses, paid to accomplish, or to acquire an asset used directly in
carrying on, one or more of the purposes described in section 170(c)(2)(B) of the Code, which includes charitable
purposes.

Section 4942(g)(2)(A) of the Code provides that an amount of income that is set aside for a specific project within

one or more purposes of section 170(c)(2)(B) of the Code may be treated as a qualifying distribution if the amount
meets the set-aside requirements of section 4942(g)(2)(B) of the Code.

231


-2- 200032047

Section 4942(g)(2)(B) of the Code provides, in pertinent part, that an amount set aside for a specific project may
be treated as a qualifying distribution if, at the time of the set-aside, the private foundation establishes to the
satisfaction of the Secretary that the amount set aside will be paid for the specific project within five years and that
the suitability test for a set-aside under section 4942(g)(2)(B)(i) of the Code is met.

Section 4942(g)(2)(B)(i) of the Code provides a suitability test in which the private foundation at the time of the
set-aside must establish to the satisfaction of the Secretary that the specific project is one that can better be
accomplished by the set-aside of income rather than by the immediate payment of funds.

Section 53.4942(a)-3(b)(1) of the Foundation and Similar Excise Taxes Regulations provides that the amounts
of income set aside for a specific project for one or more of the purposes in section 170(c)(1) or 170(c)(2)(B) of the
Code may be treated as qualifying distributions for the tax year(s) in which such amounts are set aside, but not in
the tax year in which actually paid, if the requirements of section 4942(g)(2)(B)(i) of the Code are met, the
foundation establishes to the satisfaction of the Commissioner that the amount set aside will be paid for the specific
project within 60 months after it is set aside, and the set-aside otherwise meets the suitability test of section
53.4942(a)-3(b)(2) of the regulations.

Section 53.4942(a)-3(b)(2) of the regulations provides that its suitability test for a set-aside is met if the
foundation establishes that the specific project is one in which relatively long-term grants or expenditures must be
made. The regulation cites, as an example of a suitable project, a plan to erect a building to house the direct
charitable, educational or similar exempt activities of the foundation, such as a museum building, even if the exact
location and architectural plans have not been finalized.

Section 53.4942(a)-3(b)(7)(i) of the regulations provides that a private foundation must obtain Internal Revenue
Service approval of its set-aside of income under the suitability test by applying before the end of the tax year in
which the amount is set aside.

You have timely sought approval of your set-aside of income in advance of the time when the amounts of
income are to be set aside, as required by section 4942(g)(2)(B)(i) of the Code and section 53.4942(a)-3(b)(7)(i) of
the regulations.

Your set-aside of x for the construction and renovation of your facilities will be for a specific project within the
charitable purposes of section 170(c)(2)(B) of the Code, as required by section 4942(g)(2)(A) of the Code and
section 53.4942(a)-3(b)(2) of the regulations.

You represent that your amounts of income to be set aside for this specific project will be paid out for this project
within 60 months from the time when the first amount is set aside, as required by section 4942(g)(2)(B) of the Code
and section 53.4942(a)-3(b)(1) of the regulations.

Your project is better accomplished by this set-aside of income, rather than by immediate payment, under the
suitability test of section 4942(g)(2)(B)(i) of the Code and section 53.4942(a)-3(b)(2) of the regulations because the
set-aside will provide you adequate time to hire contractors, secure the necessary permits, and file papers to obtain
a financial feasibility review.

Thus, your specific project of renovating your existing facility and constructing additional facilities meets the
requirements for a set-aside of income under the suitability test of section 4942(g)(2)(B)(i) of the Code and section
53.4942(a)-3(b)(2) of the regulations.

Accordingly, we rule that your amounts of income of up to x dollars to be set aside for your renovation and

construction project will be qualifying distributions under section 4942(g)(2)(B)(i) of the Code and section
53.4942(a)-3(b)(2) of the regulations in your tax year(s) when such amounts are set aside.

232


-3- 200032047

Section 53.4942(a)-3(b)(8) of the regulations provides that any set-aside approved by the Internal Revenue
Service must be evidenced by the entry of a dollar amount in your books and records as a pledge or obligation to be
paid at a future date or dates. Further, the amount of the set-aside must be taken into account in determining your
minimum investment return (see section 53.4942(a)-2(c)(1) of the regulations), and any income attributable to a set-
aside must be taken into account in computing your adjusted net income (see section 53.4942(a)-2(d) of the
regulations).

Because this ruling letter could help to resolve any questions, please keep it in your permanent records and
include a copy in your annual return, Form 990-PF.

This ruling letter is directed only to the organization that requested it. Section 6110(k)(3) of the Code provides
that it may not be used or cited as precedent.

Sincerely,

(signed) Garland A. Carter
Garland A. Carter

Manager, Exempt Organizations
Technical Group 2

233