IRS approves a private foundation's set-aside for a hospital matching grant

Plain-English summary

The IRS approved a private foundation's request to treat a set-aside as a qualifying distribution under section 4942(g)(2). The set-aside would fund a matching grant to a public charity for construction of a hospital addition. The IRS accepted that deferring payment would help stimulate matching contributions and allow the foundation to retain control over the funds until the construction project progressed. The foundation was required to pay the set-aside within 60 months after the first set-aside.

Ruling snapshot

• Question: Could the foundation's set-aside for a hospital matching-grant project qualify under IRC § 4942(g)(2)?
• Outcome: Approved
• Key authorities: IRC §§ 4942(g)(2), 4942(e)(1)(A), 4942(f), and 6110(k)(3); Treas. Reg. § 53.4942(a)-3(b)

Full text (IRS public release)

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

Release Number: 201307010
Release Date: 2/15/2013 Employer Identification Number:
Date: November 20, 2012

Contact Person - ID Number:

Contact Telephone Number:

LEGEND VIL LIST:
4942 .03-07

V=
W=
X=

IQIG [TIM |

Dear
Why you are receiving this letter

This is our response to your March 1, 2012, 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 approval of a set-aside of a dollars for the taxable year
ending December ,20 __ for the purpose of a matching grant pledged to V, a
public charity described in Section 501(c)(3) of the Internal Revenue Code. V will

use the funds it raises with the help of your matching grant to assist in the
construction of W, a major addition to X, a hospital facility located in Y. The total
estimated cost of W is b dollars, of which approximately c dollars in pledges have
currently been made by government and private sources. Your agreement with V
aims to raise a total of d dollars by establishing a dollar for dollar match. On or
betore December 31, 20 , you will pay to V from the set-aside an amount equal
to the contributions it received for the Project, up to the amount of the set-aside.
You believe that V can reasonably be expected to raise a dollars by December 15,
20 , the date the matching contribution offer expires.

Your project is better accomplished through a set-aside than through an
immediate payment of funds, because the purpose of a matching grant is to
stimulate contributions by other persons or entities and this cannot be
accomplished unless the payment of the grant is deferred until the contributions
that qualify for matching are actually received. In the present case it is likely that
will require an extended period of time to secure a dollars in contributions. The set-
aside will also allow you to retain control over the matching funds in order to
ensure that construction progresses as planned, and that the funds disbursed are
used solely for the construction of W.

One of your foundation managers has provided a written statement that the a
dollars set aside will actually be paid to V within 60 months to the date of the set-
aside.

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

-3-

Regulations provides that specific projects better accomplished using a set-aside
include projects where grants are made as part of a matching-grant program.

What you must do

Your approved set-aside will be documented on your records as a pledge or
obligation 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,

Holly O. Paz
Director, Exempt Organizations
Rulings and Agreements

Enclosure