PLR 200926030: Opera-program set-aside qualifies as a distribution

Plain-English summary

A private non-operating foundation asked the IRS to approve the unpaid balance of a multiyear pledge to an exempt opera company. The funds were intended to help the company meet the expenses of operas scheduled for 2010 and 2011. The foundation represented that it would pay the set-aside within 60 months and argued that installment payments would promote long-term fundraising, make future programming more credible to other contributors, and encourage economical operations. The IRS concluded that the opera programming was a specific charitable project better accomplished through a set-aside than immediate payment. It ruled that the set-aside met the suitability test under section 4942(g)(2)(B)(i) and constituted a qualifying distribution.

Ruling snapshot

• Question: Did the foundation's set-aside for future opera programming satisfy the section 4942 suitability test?
• Outcome: Approved
• Key authorities: IRC §§ 170(c)(2)(B) and 4942(g); Treas. Reg. § 53.4942(a)-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury Director, Exempt Organizations P.O. Box 2508 - Room 4122 Cincinnati, Ohio 45201

Release Number: 200926030
Release Date: 6/26/09 Employer Identification Number:

Date: 4/1/2009
Person to Contact —- ID#:

Contact Telephone Numbers:
Phone
Fax

UIL
4942.03.07

LEGEND

C =
D =
s =
t =
u =
v =

Dear

By letter dated December 31, 2008, you requested a ruling that a set-aside in the amount of $t for the taxable years ending December 31, meets the requirements of Section 4942(g) (2) (B) (i) and accordingly constitutes a qualifying distribution under section 4942(g).

FACTS

You are a trust exempt from federal income tax under section 501(c) (3) of the Code and are classified as a private non-operating foundation under section 509(a).

On April 15, you pledged $s to assist C (hereafter, “the Company”), an opera company located in D which is exempt under section 501(c) (3) of the Code, to meet the expenses of the operas it will program and present in
, , and . Of the $s pledged, you paid one installment of
$u in the course of , and are requesting approval of the remaining $t of the pledged amount. This will be paid out in installments of $u in and $v in

There are no planned additions to the set-aside.

LAW

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Section 4942(g) (1) of the Code defines “qualifying distribution” as (a) any amount paid to accomplish one or more purposes described in section 170(c) (2) (B), other than any contribution to (i) an organization controlled by the foundation or one or more disqualified persons, or (ii) a private foundation which is not an operating foundation, except as otherwise provided; (b) any amount paid to acquire an asset used directly in carrying out one or more purposes described in section 170(c) (2) (B).

Section 4942(g) (2) (A) of the Code provides that, for all taxable years beginning on or after January 1, 1975, an amount 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 requirements of section 4942(g) (2) (B).

Section 4942(g) (2) (B) (i) of the Code provides 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 foundation establishes to the satisfaction of the Secretary the amount set aside will be paid for the specific project within five years, and the specific project is one that can better be accomplished by the set-aside of income rather than by the immediate payment of funds (the “suitability test”).

Section 53.4942(a)-3(a) (2) (iii)defines as a qualifying distribution any amount set aside within the meaning of paragraph (b) of section 3.

Section 53.4942(a)-3(b) (1) of the Foundation and Similar Excise Tax 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) and paragraph (b) are satisfied. The requirements of paragraph (b) are satisfied 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 (i) the set-aside otherwise meets the suitability test of section 53.4942(a)-3(b) (2) or (ii) the foundation satisfies the cash distribution test.

Section 53.4942(a)-3(b) (2) of the regulations provides that the suitability test for a set-aside is met if the foundation establishes the specific project is one in which relatively long-term grants or expenditures must be made in order to assure the continuity of particular charitable projects or program-related investments.

Section 53.4942(a)-3(b) (7) (i) 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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ANALYSIS

You have sought timely approval of its set-asides of income in accordance with Section 53.4942(a)-3(b) (7) (i).

As required by Section 4942(g) (2) (A) of the Code and Section 53.4942 (a)- 3(b) (1) of the Regulations, your proposed set-asides will be for specific projects for one or more of the purposes in section 170(c) (2) (B) of the Code. The specific project for which the funds have been set aside is to assist the Company in meeting expenses of the operas it will program and present in 2010 and 2011.

You have represented that the amount set-aside for this specific project will be paid out within 60 months from the set-aside, as required by section 4942(g) (2) (B) (i) of the Code and section 53.4942(a)-3(b) (1) of the regulations.

Your project can better be accomplished by a set-aside of income rather than by the immediate payment of funds. The specific project is one in which relatively long-term grants or expenditures must be made in order to assure the continuity of particular charitable projects. By restricting the immediate availability of funds to the Company you are able to ensure that they will not be expended prior to 2010 and 2011. This will compel the Company to be fiscally responsible. First, it compels them to establish a long-term fundraising plan, since your contributions in any given year will not be sufficient to meet their current expenditures. Secondly, the pledge of future contributions makes the success of each year’s programming more believable, encouraging contributions from other sources. Finally, spreading out the support encourages economy in the operations of the charity, which is another factor encouraging contributions from others.

Your project therefore satisfies the suitability test as set forth in Section 4942(g) (2) (B) (i)of the Code and Section 53.4942(a)-3(b) (2)of the Regulations.

RULING
Based on the foregoing, the set-aside of $t for the taxable year ending December 31, 2008, meets the requirements of Section 4942(g) (2) (B) (i) and accordingly constitutes a qualifying distributions under section 4942(g).

We direct your attention to Section 53.4942(a)-3(b) (8) of the regulations, entitled “Evidence of Set-Aside.” This section provides that any set-aside

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approved by the Internal Revenue Service shall be evidenced by the entry of a dollar amount in the books and records of a private foundation 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 the foundation’s 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 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 Internal Revenue Service.

This ruling does not address the applicability of any section of Code or regulations to the facts submitted other than with respect to the sections described.

This ruling letter is directed only to the organizations that requested them. Section 6110(k) (3) of the Code provides that they 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 persons

whose name and telephone number are shown above in the heading of this letter.

Sincerely yours,

Robert Choi
Director, Exempt Organizations
Rulings and Agreements