PLR 201105052: Foundation set-aside approved as a qualifying distribution

Plain-English summary

The IRS approved a private foundation's plan to set aside funds for a public charity's multi-year conservation program. The program involved technical support, capacity building, and direct financing, with annual payments conditioned on reports showing progress toward agreed milestones. The foundation represented that the set-aside would be paid within 60 months and that the project would be better accomplished through a set-aside than immediate payment. The IRS concluded that the set-aside for the taxable year ending December 31, 2009, satisfied the suitability test and counted as a qualifying distribution under IRC § 4942(g).

Ruling snapshot

• Question: Does the foundation's proposed multi-year project set-aside qualify 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; Rev. Rul. 77-7.

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: 201105052 Employer Identification Number: Release Date: 2/4/11

Date: 4/26/10
Person to Contact - ID#:

Contact Telephone Numbers:

Phone

Fax
UIL
4942.03.07

LEGEND

B= Name of State

C= Name of Public Charity
D= Name of Program

x = Total amount of set-aside
y = Annual payment amount
z= Total cost of project

Dear

This is in reply to your written request for approval of a set-aside under section 4942(g)(2) of the Internal Revenue Code. You are a corporation formed under the laws of the state of B exempt from federal income tax under section 501(c)(3) of the Code and classified as a private non-operating foundation under section 509(a).

FACTS

You wish to set aside $x for the development and implementation by C of the Second Phase of the D. This program provides technical support, capacity building and direct financing for the implementation of conservation agreements by C and partner organizations.

Five annual payments of $y will be made annually to C for the work completed in the prior calendar year on the implementation of the D. These payments will be disbursed beginning May 31, 2010 through May 31, 2014, following the submission of Technical reports demonstrating progress toward the agreed on milestones between you and the D. The

estimated cost of the entire program is $z. It is anticipated to be met through a combination of private sector contributions, and foundation and international organization grants.

You have stated that periodic payments are conditioned on submission of technical reports demonstrating progress toward annual agreed upon milestones.

No additions to the set-aside for this project are contemplated.

You have provided a representation that amounts set aside for future payments will actually be paid within 60 months of December 31, 2009.

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 which comes within one or more purposes described in section 170(c)(2)(B) may be treated as a qualifying distribution if it meets the requirements of subparagraph (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 this section .

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) and paragraph (b)are satisfied. The requirements of paragraph (b) are satisfied if the foundation establishes to the satisfaction of the

Commissioner 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 to the satisfaction of the commissioner that 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 CB 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 used to accomplish purposes described in section 170(c)(2)(B) of the Code, namely, to provide technical support, capacity building and direct financing for the implementation of conservation agreements.

The funds set aside will be disbursed to a public charity earmarked for a project, which is a “specific project” within the meaning of Section 53.4942(a)-3(b)(2).

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 is one that can better be accomplished by the set-aside of income rather than by the immediate payment of funds. The periodic payments for this project are conditioned on submission of technical reports demonstrating progress toward annual agreed-upon

milestones.

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 $x 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).

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 will be made available for public inspection under section 6110 of the Code after certain deletions of identifying information are made. For details, see enclosed Notice 437, Notice of Intention to Disclose. A copy of this ruling with deletions that we intend to make available for public inspection is attached to Notice 437. If you disagree with our proposed deletions, you should follow the instructions in Notice 437.

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. A copy of this letter has been sent to your authorized representative.

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

Enclosure: Notice 437