IRS approves matching-grant set-aside for historic restoration

Plain-English summary

A private foundation asked to set aside funds for a matching grant to a public charity restoring a historically and culturally significant structure. The grant would cover about one-third of the project's estimated cost, with the rest expected from fundraising prompted by the matching challenge. Payment depended on the charity raising a specified amount and satisfying conditions involving the architect and restoration plans. The IRS concluded that the matching-grant project met the suitability test for a set-aside and approved it under § 4942(g)(2). The foundation had to pay the set-aside within 60 months and document it as a pledge or obligation in its records.

Ruling snapshot

• Question: Could the foundation treat its matching grant for historic restoration as an approved set-aside under § 4942(g)(2)?
• Outcome: Approved
• Key authorities: IRC §§ 170(c)(2)(B) and 4942(g)(2); Treas. Reg. § 53.4942(a)-3(b); Rev. Rul. 77-7

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

P.O. Box 2508
Cincinnati, OH 45201

Employer Identification Number:
Release Number: 201449003

Release Date: 12/5/2014 Contact Person - ID Number:
Date: September 9, 2014

Contact Telephone Number:

LEGEND

B = State
C = Name of Public Charity
D = Name of Structure
E = Geographic Location

t = Amount
u = Amount
v = Amount
w = Date
x = Date
y = Date

UIL:

4942.03-07

Dear

Why you are receiving this letter

This is our response to your October 15, 2013, letter requesting approval of a set-aside in the
amount of t dollars under Internal Revenue Code section 4942(g)(2). You have 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 for the taxable year ending December 31,
, 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 are incorporated under the laws of the state of B. You wish to set aside a grant totaling t

dollars for C. C is a public charity exempt under section 501(c)(3) of the Code, organized
under the laws of the state of B. C owns, preserves, and operates D. No additions to the set-
aside are planned. The purpose of the grant is to assist in funding the restoration of D. D is a
historically and culturally significant structure for the local E community, and it also has historic
significance on the national level.

Your grant will support Phase II restoration costs for D. The total cost of the Restoration
Project is estimated at u dollars. Pursuant to the terms of your agreement with C, you will
make a matching grant of t dollars to C to fund approximately one-third of the estimated cost of
the Restoration Project. It is anticipated that the remaining two-thirds of the costs of the
Restoration Project will be funded by donations and/or grants made to C as a result of fund-
raising activities undertaken by C in response to your matching grant challenge.

Under the terms of your agreement with C, if C has received eligible matching contributions for
the Phase II project in an amount not less than v dollars on or before w, as well as satisfies
certain other conditions of your agreement on subsequent dates (such as obtaining your
approval of the architect and the architect’s plans), then you will disburse the funds to C in a
lump sum within 10 business days thereafter. This payment must be made not later than x,
which is 10 days after the latest possible date for satisfaction of the specified conditions of your
agreement with C. The latest possible date of the payment on x is less than 60 months from y,
the date of your set-aside amount.

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, the
use of a matching-grant program, as well as projects where relatively long-term expenditures

must be made requiring more than one year’s income to assure their continuity.

Revenue Ruling 77-7, 1977-1 C.B. 354, describes a private foundation which set aside income
for eventual distribution to an unrelated public charity for construction of a specific building
project. The Service held that the building project was a “specific project” within the meaning of
the applicable Code and Regulations sections.

What you must do

Your approved set-aside(s) 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,

Director, Exempt Organizations

Enclosure
Notice 437
Redacted copy of letter