PLR 200441036: Land conservation set-aside counts as a distribution

Plain-English summary

A nonexempt charitable trust wanted to set aside income to buy two waterfront parcels for ecological preservation and later donate them to a local government. Pending legal actions to establish the sellers' marketable title made an immediate purchase impractical. The trust represented that it would spend the set-aside funds on the project within 60 months. The IRS found that the project met the § 4942 suitability test and ruled that the set-aside would count as a qualifying distribution in the years the amounts were set aside. The trust must record the set-aside as a future pledge or obligation and account for it under the specified return calculations.

Ruling snapshot

• Question: May the trust treat income reserved for the waterfront land purchase as a qualifying distribution before paying for the land?
• Outcome: Approved under the suitability test, subject to the 60-month expenditure representation.
• Key authorities: IRC § 4942(g)(2)(B)(i); Treas. Reg. § 53.4942(a)-3(b).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224 200441036

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: JUL 12 2004 Contact Person:
Uniform Issue List Number: 4942.03-07 Identification Number:

Telephone Number:

Legend
T:EO:B2

F =
L1 =
L2 =
x =

Dear

This is in reply to your ruling request for approval of a set-aside of $x 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, beginning in your tax year ended on December 31, 2002.

Our records indicate that you, F, are a nonexempt charitable trust under section 4947(a)(1) of the Code. You propose to set aside $x of your income pursuant to section 4942(g)(2)(B)(i). Your specific project for the income is to acquire waterfront lands, L1 and L2, for ecological preservation and subsequent donation to a local governmental unit for such public purposes. 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 purchase of lands L1 and L2 requires additional time for legal actions to result in marketable title to the land from the sellers.

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) that are private foundations subject to the private foundation provisions of Chapter 42.

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), 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) may be treated as a qualifying distribution if the amount meets the set-aside requirements of section 4942(g)(2)(B).

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) 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 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) 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).

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 for purchase of lands L1 and L2 will be for specific projects 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 this set-aside will provide necessary time for pending legal actions to establish the seller's marketable title to the land.

Thus, your specific project of purchase of lands L1 and L2 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 set-aside of $x of your income for purchase of lands L1 and L2 will be 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 years when the amounts of income 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) ), 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) ).

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 on 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,
/s/
Joseph Chasin

Manager, Exempt Organizations
Technical Group 2