Determination 1031037: IRS approved a foundation's set-aside for a historic-building matching grant

Plain-English summary

The IRS approved a private foundation's set-aside for a matching grant to a publicly supported charitable organization. The grant would help restore a historically and architecturally significant facility and create a cultural center. The IRS found that the project qualified as a specific project under IRC § 4942(g), that the set-aside would be paid within 60 months, and that a matching-grant program satisfied the suitability test. The set-aside therefore qualified as a qualifying distribution for the foundation's 2009 taxable year.

Ruling snapshot

• Question: Could the foundation treat its set-aside for a historic-building matching grant as a qualifying distribution?
• Outcome: Approved
• Key authorities: IRC §§ 170(c)(2)(B) and 4942(g); Treas. Reg. §§ 53.4942(a)-2 and 53.4942(a)-3

Full text (IRS public release)

Internal Revenue Service
Director, Exempt Organizations

Department of the Treasury
P.O. Box 2508 - Room 4122
Cincinnati, Ohio 45201

Release Number: 201031037
Release Date: 8/6/10
Date: 5/14/2010
Employer Identification Number:

Person to Contact - ID#:

Contact Telephone Numbers:
Phone
Fax

UIL
4942.03.07

LEGEND

B= Publicly supported charitable organization
C= Facility
D= State
E= City
t= Amount of matching grant
u= Total cost of renovation project Phase I
v= Amount to be raised in eligible matching contributions
w= Latest date by which v can be raised
x= Latest date of distribution of matching grant
y= Date of set-aside

Dear

By letter dated October 22, 2009, you requested a determination that a set-
aside in the amount of $t for the taxable year ending December 31, 2009,
meets the requirements of Section 4942(g)(2)(B)(i) and accordingly
constitutes a qualifying distribution under section 4942(g).

FACTS

You are incorporated under the laws of the State of D, are 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).

You are dedicated to D’s cultural history and heritage through preserving
regionally and nationally important historic buildings and decorative arts
projects. You support significant projects that strive for high
preservation standards and show a strong degree of local support.

You wish to set aside $t for the purpose of a matching grant in support of
a project of B, a publicly supported organization exempt under Section
501(c)(3) of the Internal Revenue Code. B will reconstruct, restore and
add public spaces to C, an historically and architecturally significant
structure listed in the National Register of Historic Places. Once restored
C will provide a cultural center for the community of E, supporting the
performing arts within the community and helping to reinvigorate E’s
historical downtown district.

B’s project will be divided into four phases. This grant will support Phase
I of the restoration project, which will focus on the restoration of the
front section of C, including construction of a replica of the original
canopy, exterior and exterior lighting, restoration of the entryway and a
historically accurate mezzanine lobby; addition of modern restrooms and air
conditioning, and electrical upgrades; and roof, storm sewer and storm
drainage repairs. Phase I is estimated to cost $u. By the terms of your
agreement with B, you shall make a matching grant of $t, one third of the
estimated cost of Phase I. The remaining two thirds of the costs, $v, will
be funded by grants and donations to B through a fundraising campaign based
on the matching grant. The grant will be paid only if B has received
eligible matching contributions, including binding pledges and in-kind
contributions, in an amount not less than $v by a date on or before w. The
grant is also subject to certain other conditions precedent, including your
approvals of the architect and architect’s plans, completion of
infrastructure improvements by the municipality of E, and your satisfaction
that B has sufficient funding to complete the restoration project as
embodied in the plan. The grant will be disbursed in a lump sum to B within
10 days of its satisfaction of these conditions precedent, no later than x,
within 60 months of y, the date of the set-aside.

LAW

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) of the Foundation and Similar Excise Tax
Regulations 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) 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, or where grants are made as part of a matching
grant program.

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.

In Revenue Ruling 77-7, 1977-1 C.B. 354, the term “specific project” as
defined in section 53.4942(a)-3(b)(2) of the Excise Tax Regulations was
held to include a building project to be undertaken by a public charity
unrelated to the foundation making the set-aside.

ANALYSIS

You have sought timely approval of your set-aside 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-aside will be for a specific
project for one or more of the purposes in section 170(c)(2)(B) of the
Code. The matching grant is in furtherance of educational purposes within
the meaning of in section 170(c)(2)(B).

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 as part of a
matching grant program.

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, 2009, 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
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.
Copies of this letter have been sent to your authorized representatives.

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