Foundation may set aside funds for animal welfare facility

Plain-English summary

A private foundation planned to renovate a donated commercial building into an animal shelter, research and training facility, and home for its grantmaking and public education programs. Design and construction costs would be incurred over about two years, with installment payments tied to benchmarks the foundation could not control. The foundation planned to pay the set-aside within about two years and no later than three years. The IRS concluded that the multi-year project could be better accomplished through a set-aside than immediate payment and approved the set-aside under IRC § 4942(g)(2). The amount must be paid within 60 months after the first set-aside.

Ruling snapshot

• Question: Could the foundation treat funds reserved for its animal welfare facility as a qualifying distribution?
• Outcome: Approved, subject to the 60-month payment deadline
• Key authorities: IRC §§ 170(c)(2)(B) and 4942(g)(2); Treas. Reg. § 53.4942(a)-3(b); Rev. Rul. 74-450

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201501016 Employer Identification Number:

Release Date: 1/2/2015
Date: October 9, 2014 Contact Person - ID Number:

Contact Telephone Number:

LEGEND UIL

b= dollar amount 4942.03-07
c= dollar amount

Y= date

Dear

Why you are receiving this letter

This is our response to your April 23, 2013 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 are requesting to set aside b dollars in the fiscal year ending Y, for the
purpose of funding multi-year construction and renovation of a property you own to
house your charitable activities. The property is a commercial office building you
received as a contribution and is not subject to any mortgage or lien. Your purpose
is to provide innovative solutions to challenging issues in the promotion of animal
welfare. The renovated property will be used as a companion-animal shelter, a
research and training facility, and house your grant-giving program and public
education program.

Construction is expected to begin at the start of the fiscal year after Y and you
anticipate the facility will be operational within a year of that date. The total cost of

the project is expected to be around c dollars. You do not expect any additions to
the set-aside after the initial establishment.

Your project can be better accomplished by a set-aside because expenses for the
design and construction of your project will be incurred over approximately two
years. Payments will most likely be made in installments conditioned on
completion of a particular benchmark. Because you will not be able to control the
timing of the benchmarks, you will not be able to cause these payments to meet
the minimum distribution requirements of Section 4942 of the Internal Revenue
Code.

You have provided a statement signed by your president that you plan to set aside
b dollars, which will be paid out in approximately two years, but no more than
three.

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 74-450, 1974-2 C.B. 388, an operating foundation converted a
portion of newly acquired land into a public park under a four-year construction
contract. The construction contract payments were to be made mainly during the
final two years. This constituted a “specific project.” The foundation's set-aside of
all its excess earnings for four years was treated as a qualifying distribution under
Internal Revenue Code section 4942(g)(2).

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.

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

letter.

Sincerely,

Director, Exempt Organizations
Enclosures
Form 872

Redacted letter