PLR 200121077: Library archive grant qualifies as a foundation set-aside

Plain-English summary

A private foundation proposed to set aside funds for a grant to a state university library. The library would catalog, study, and preserve the papers of a historically significant person whose child had been a donor and director of the foundation. The foundation said it would pay the grant within 60 months and that waiting would let the library use the funds when its facilities and programs were ready. The IRS approved the set-aside under the suitability test of IRC § 4942(g)(2)(B)(i) as a qualifying distribution for the tax year ending December 31, 1998. The letter also explains that an approved set-aside must be recorded as a pledge or obligation in the foundation's books.

Ruling snapshot

• Question: Can the foundation count a set-aside for the library's historical papers project as a qualifying distribution?
• Outcome: Approved for the stated tax year under the suitability test.
• Key authorities: IRC §§ 170(c)(2)(B), 4942(g)(2); Treas. Reg. § 53.4942(a)-3(b).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224
200121077

Date: FEB 27 2001
Contact Person:
Significant Index Number: 4942.03-07
Contact Number:

T:EO:B2

Legend

F =
x =
U =
D =

Dear Applicant:

This is in reply to your ruling request of December 27, 1999, requesting approval of a 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, F, 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 for the income is your grant of "x" amount of dollars to U, which is a library of a state university. The grant will be used to catalog, study, and preserve the papers of a nationally well-known deceased individual "D" of historical significance who left such papers to the library. D was a parent of the principal donor and director of F who is also now deceased. 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 this set-aside will be paid at such time that the library construction and programs become ready to use the grant.

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 the 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.

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200121077

Section 4942 of the Code imposes 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.

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 requirements are met if 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.

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200121077

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 for this historical papers project of the library will be for a specific project within the educational 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 this set-aside will provide adequate time for the grant to be made when the library project becomes operational.

Thus, your specific project of a grant for this library's project 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 setting aside of "x" dollars for this historical papers project of the U library is a qualifying distribution under section 4942(g)(2)(B)(i) of the Code and section 53.4942(a)- 3(b)(2) of the regulations for your tax year ending on December 31, 1998.

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.

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,

Terrell M. Berkovsky
Manager, Exempt Organizations
Technical Group 2