IRS approves a private foundation's five-year research set-aside

Plain-English summary

The IRS approved a private foundation's request to set aside funds for a multi-year biomedical research project to develop a cure for a redacted disease. The foundation planned to fund a national, multi-phase effort, with annual progress reports and possible audits of the grantee. The IRS concluded that the project could be better accomplished through a set-aside than through an immediate payment because it required a substantial accumulation of funds and a long research period. The set-aside had to be paid within 60 months and recorded as pledges or obligations in the foundation's books.

Ruling snapshot

• Question: Could the foundation treat funds reserved for a large, multi-year scientific research project as a qualifying set-aside under IRC § 4942(g)(2)?
• Outcome: Approved
• Key authorities: IRC §§ 4942(g)(2), 4942(e)(1)(A), 4942(f), and 170(c)(2)(B); Treas. Reg. § 53.4942(a)-3

Full text (IRS public release)

Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Department of the Treasury

Release Number: 201233019
Release Date: 8/17/2012
Date: 4/11/2012

Employer Identification Number:
Contact Person - ID Number:
Contact Telephone Number:

LEGEND

UIL LIST:
4942.03-07

x = Amount of set-aside
U = Date of set-aside
V = Name of Grantee Institute
M = Name of Disease
S = Name of Doctor
y = Disbursement for years 1 through 4
z = Disbursement for Year 5

Dear

This is in response to your December 9, 2011, letter requesting approval of a set-
aside under Internal Revenue Code section 4942(g)(2). You’ve been recognized
as tax-exempt under section 501(c)(3) of the Code and have been determined to
be a private foundation under section 509(a).

Description of set aside request

You have requested a set-aside of $x for the tax year ending U to fund V’s work to
develop a cure for M. The grant shall be employed exclusively to support research
of M through a collaborative national multi-phased effort led by S, the President of
V. The funding for a given year may be disbursed by the foundation in one or
more payments over the year of support. The nature and purpose of the research
project will include an annual conference, a national grants component, and
advanced scientific research. Funding is contingent upon S leading the national
multi-center effort. Funding shall not be used for the following:

• General institutional expenses.

• General fundraising campaign expenses such as dinners and mass
  mailings.

• As a contribution to unified funds or to a pooled fund that is itself used to
  award grants of any kind except as specified.

• Social science, religious, political, or other research that does not fall within
  your areas of interest.

The set-aside will be disbursed within 60 months of the date of the set-aside. You
closely monitor V’s use of your funds: they must submit annual progress reports to
you, and you can cause an independent audit to be performed on their accounts at
any time during the term of the grant.

The annual conference will bring together leading scientists from around the nation
to discuss the development of a cure for M. The funding you will provide for V’s
program is expected to stimulate larger grants from other sources. Disbursements
from the set-aside will be $y a year for each of years 1 through 4, and $z for year
5.

You plan to provide additional funding to V for the same project. However these
are not additions to the set-aside for this project which is $x.

The project can be better accomplished by a set-aside than by an immediate
payment of funds because, on the one hand, development of treatments in
biomedical research can only be achieved in an extended timeframe, and on the
other hand, there must be strict accountability for the grantee’s use of the funds it
receives. A truly integrated, highly functional, multidisciplinary team takes a
minimum of five years to achieve maximum efficacy. The meeting of regulatory
requirements also demands a substantial amount of time. As a result,
breakthroughs can take ten years or more from inception to trial. This being so, a
commitment to support efforts to develop a cure for M over the long term is
required. Therefore to ensure that the research team remains accountable, it is
important that they submit annual progress reports which will be the basis of
continued funding over the 60 month term of the project.

Law

Internal Revenue Code section 4942(g)(2)(A) states that an amount set aside for a
specific project, which includes one or more purposes described in section
170(c)(2)(B), may be treated as a qualifying distribution if it meets the
requirements of section 4942(g)(2)(B).

Section 4942(g)(2)(B) of the Code states that an amount set aside for a specific
project will meet the requirements of this subparagraph if, at the time of the set-
aside, the foundation establishes that the amount will be paid within five years and
either clause (i) or (ii) are satisfied.

Section 4942(g)(2)(B)(i) of the Code is satisfied if, at the time of the set-aside, the
private foundation establishes to the satisfaction of the Secretary that the project
can better be accomplished using the set-aside than by making an immediate
payment of funds.

Section 53.4942(a)-3(b)(1) of the Foundations and Similar Excise Taxes
Regulations provides that a private foundation may establish a project as better
accomplished by a set-aside than by immediate payment of funds if the set-aside
satisfies the suitability test described in section 53.4942(a)-3(b)(2).

Section 53.4942(a)-3(b)(2) of the Foundations and Similar Excise Taxes
Regulations provides that specific projects better accomplished using a set-aside
include a plan to fund a specific research program that is of such magnitude as to
require an accumulation of funds before beginning the research.

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.

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 your proposed set aside will be
used to accomplish purposes described in section 170(c)(2)(B) namely for
scientific research purposes.

As required by Section 53.4942(a)-3(b)(2) of the Regulations your proposed set
aside will be used to fund a specific research program that requires an
accumulation of funds before beginning the research.

As required by section 4942(g)(2)(B)(i) of the Code and Section 53.4942(a)-3(b)
(1) of the Regulations you have established that the amount set-aside for this
specific project will be paid out within 60 months.

Your project is one that can better be accomplished by the set aside of income
rather than by the immediate payment of funds. Like the example in section
53.4942(a)-3(b)(2) the project you have undertaken is of such magnitude as to
require an accumulation of funds before beginning the research. 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 information furnished, your set-aside program is approved under
Internal Revenue Code section 4942(g)(2). As required under section 4942(g)(2),
the set aside amount must be paid within the 60-month period after the date of the
first set-aside.

Your approved set-aside(s) shall be evidenced by the entry of the dollar amounts
involved on your books and records as pledges or obligations to be paid by the
date specified. The amounts set aside will be taken into account to determine your
minimum investment return under Internal Revenue Code section 4942(e)(1)(A),
and the income attributable to your set aside(s) will also be taken into account in
computing your adjusted net income under section 4942(f) of the Code.

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 determination is directed only to the organization that requested it. Internal
Revenue Code section 6110(k)(3) provides that it may not be used or cited as a
precedent.

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

If you have any questions, please contact the person listed in the heading of this
letter.

Sincerely,

Lois Lerner
Director, Exempt Organizations

Enclosure: Notice 437
Redacted copy of approval letter