PLR 200430043: Building-grant set-aside qualifies as a distribution

Plain-English summary

A private foundation asked whether it could count money reserved for a grant to another charity as a qualifying distribution before paying it. The grant would help construct a building adjoining the recipient's existing facilities. The foundation planned to pay in two installments as construction progressed and said all reserved funds would be paid within 60 months. The IRS approved the set-aside under the suitability test in section 4942(g)(2)(B)(i), reasoning that reserving the funds would let the foundation monitor construction and other funding before completing payment. The ruling applies to the amounts set aside in the tax years when they are reserved.

Ruling snapshot

• Question: Can a foundation count a building-grant set-aside as a qualifying distribution under the suitability test?
• Outcome: Approved, for up to the stated grant amount.
• Key authorities: IRC § 4942(g)(2); Treas. Reg. § 53.4942(a)-3(b).

Full text (IRS public release)

200430043

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

Date: APR 26 2004
Contact Person:
UIL:4942.03-07
Identification Number:
Telephone Number:

Employer Identification Number:

Legend

F=
D=
X=
Y=
Z=

Dear

This is in reply to your ruling request of December 15, 2003. You, F, have requested approval of a proposed set-aside grant to be made to D 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 are exempt under section 501(c)(3) of the Code and are a private foundation under section 509(a) of the Code. D is exempt under section 501(c)(3) of the Code and is described in section 509(a)(2). You request the set-aside apply to your fiscal year ended

The set aside grant for Z is for the purpose of providing funding for the construction of a

square foot building that will adjoin D's existing facilities. The project will provide additional space for D research and clinical activities. D estimates the project will cost $X. At the time of the ruling request, D has received approximately Y in commitments from other donors. You plan to pay the grant in two equal installments. One-half of the grant will be paid upon the project's groundbreaking and the balance will be paid at the earlier of completion of the project or five years from the date of execution of the grant agreement. You do not anticipate there will be any additions to the set-aside after its initial establishment.

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 state the project can be better accomplished by a set-aside than by the immediate payment of funds because it will allow you to retain control over the distribution of the funds to ensure construction progresses as planned, will insure funding is received from other sources, and will insure your contributions are used solely for the project purposes.

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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.

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 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 provide matching grants.

200430043

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 sought timely 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 Z for a specific project is 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 your 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 allow you to retain control over the distribution of the funds to ensure construction progresses as planned, to insure funding is received from other sources, and to insure your contributions are used solely for the project purposes.

Thus, your specific project of stream conservation 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 the purpose of providing funding for the construction of a building that will adjoin D's existing facilities 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.

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).

This ruling is based on the understanding there will be no material changes in the facts upon which it is based. Any changes that may have a bearing on your tax status should be reported to the Service. This ruling does not address the applicability of any section of the Code or regulations to the facts submitted other than with respect to the sections described.

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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.

Please keep a copy of this ruling letter in your permanent records.

If you have any questions about this ruling, please contact the person whose name and telephone number are shown in the heading of this letter.

Sincerely,

(signed) Marvin Friedlander

Marvin Friedlander
Manager, Exempt Organizations
Technical Group 1