IRS determination 1237023: Private foundation set-aside approved for hospice-house construction

Plain-English summary

The IRS approved a private foundation's request to set aside funds for construction of a freestanding hospice house. The project was expected to require several years of planning, fundraising, design, and construction, and the foundation represented that the set-aside amounts would be paid within 60 months of the first set-aside. The IRS concluded that the project qualified under section 4942(g)(2) because it could be better accomplished through a set-aside than through an immediate payment. The determination also explains how the set-asides affect the foundation's minimum investment return and adjusted net income calculations.

Ruling snapshot

• Question: May a private foundation treat amounts accumulated for a multi-year hospice-house project as qualifying set-asides?
• Outcome: Approved, subject to the five-year payment period and recordkeeping requirements.
• Key authorities: IRC §§ 4942(g)(2), 4942(e)(1)(A), and 4942(f); Treas. Reg. § 53.4942(a)-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Employer Identification Number:
Release Number: 201237023
Release Date: 9/14/2012 Contact Person - ID Number:

Date: 5/11/2012
Contact Telephone Number:

LEGEND UIL LIST:
4942.03.07

V = Location
X = Name
Y = Name

b dollars = Amount
c dollars = Amount
d dollars = Amount
e dollars = Amount
f dollars = Amount
g dollars = Amount

Dear

Why you are receiving this letter

This is our response to your November 22, 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).

Our determination

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.

Description of set-aside request

You have requested a set-aside of b dollars for the tax year ending December 31,
2011, and additional set asides of c dollars, d dollars, e dollars, and f dollars for
the tax years 2012 through 2015, respectively, to fund the Project, as described in
the following. There is currently no freestanding hospice house facility in V so end
of life care is available only in an institutional hospital setting, which is very
expensive, and a very structured place for a hospice patient nearing life’s end

You will provide funding for the construction of a freestanding hospice house,
estimated to cost g dollars. The facility, will be located among trees and green
space, moreover, it will, include over ten suites with home-like décor and private
restrooms, family space, chapel and ample parking as well as room to expand to
more suites. The facility you propose to help fund will reduce Medicare costs while
providing patients with quality care, dignity, comfort and compassion, as well as
enabling their families to focus on being together.

You have been conducting research for the project for over three years by touring
numerous facilities which has enabled you to gather information about startup
processes, state and federal regulations, staffing requirements, financials, and
recommended house plans. Meetings have been held with the local major medical
centers’ administrators and home care service providers in your area, who see a
need for such a facility. You will not own and operate the hospice yourself but the
owner will be an exempt organization under section 501(c)(3). You anticipate that
the hospice house will be a joint venture of two regional hospitals, X and Y. Both
X and Y are exempt under Section 501(c)(3). Moreover, an existing LLC which is
an umbrella organization of X and Y and currently operates other joint healthcare
initiatives of these entities may be the joint owners. Most hospice houses that
operate in this fashion are also able to get services from the owners such as
medical supplies, food services and some staffing.

In order to fund the Project in its entirety, as is your intention, you will have to raise
a very large amount in grants and contributions from outside sources in addition to
dedicating your entire annual distributable amounts through 2019, when the
Project is expected to be completed. You anticipate that it will take several years
for your fundraising campaign to produce a substantial amount of revenue. The
Project is currently in the planning stages. In 2013, a consulting firm will be hired
to conduct a feasibility study; in 2014, the architect will be engaged, and the
fundraising campaign will open. The fundraising campaign will be the principal
focus of your activities in 2015. Construction will commence in 2016. A foundation
manager has represented the amounts set aside in the tax years 2011, 2012,
2013, 2014 and 2015 will all have been paid out for the Project by December 31,
2016, sixty months from the date of the initial set-aside.

The project can be better accomplished by a set-aside than by an immediate
payment of funds because the planning, design and fundraising phases will take
several years to complete, with the construction phase commencing only toward
the end of the sixty-month period. Hence, your heaviest outlays will be
concentrated in the latter part of the Project period. In addition, the cost of the
Project is so high in relation to your annual income that the accumulated income
over the entire Project period will not be sufficient to finance it; therefore, you will
have to generate large new revenues from a fundraising campaign to meet your
funding goal.

The approved set-asides will permit you to accumulate your distributable amounts
for the tax years 2011 through 2015 in order to obtain the required amount of
funds to construct the hospice facility.

Basis for our determination

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 that the project can better be accomplished using
the set-aside than by making an immediate payment.

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 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, but are not limited to, projects where relatively long-term expenditures
must be made requiring more than one year’s income to assure their continuity.

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.

What you must do

Your approved set-asides will be documented on your 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.

Additional information

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 letter in your records. We have sent a copy of this letter
to your representative as indicated in your power of attorney.

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

Sincerely,

Lois Lerner
Director, Exempt Organizations

Enclosure