Foundation may set aside funds for girls' dormitory renovation

Plain-English summary

A private foundation requested approval to set aside funds to restore and expand a dormitory complex used to shelter refugees and migrant children. The project would bring the building into compliance with local regulations and create space for sixteen additional homeless girls. The foundation explained that a set-aside would help it secure commitments from other donors, monitor the work, and distribute funds over the next twelve months. The IRS approved the set-aside under IRC § 4942(g)(2), with payment required within 60 months after the first set-aside. The approved amount had to be documented as a pledge or obligation and taken into account in the foundation's minimum investment return and adjusted net income calculations.

Ruling snapshot

• Question: Did the proposed dormitory renovation funding qualify as an approved set-aside under IRC § 4942(g)(2)?
• Outcome: Approved, subject to payment within 60 months after the first set-aside
• 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

Employer Identification Number:
Release Number: 201503022

Release Date: 1/16/2015 Contact Person - ID Number:
Date: October 23, 2014

Contact Telephone Number:

LEGEND: UIL:

x = dollar amount 4942.03-07
M = organization

N = city/country

Dear

Why you are receiving this letter

This is our response to your October 31, 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

M, a 501(c)(3) entity, provides shelter to refugees and migrant children worldwide. You will
fund a project to restore and expand one of M’s dormitory complexes located in N in order to
(i) bring the building into compliance with local regulations governing orphanages and youth
homes and (ii) provide space to house sixteen additional homeless girls. The dorm is located
on the campus of one of N’s housing complexes for orphaned girls.

You request a set-aside in the amount of x dollars to be spent on the project over the next 12
months, which is no more than 60 months from the date of the set aside. You provided
specific information that describes the project and estimated amounts required to complete
the project. You also estimate that the project will be completed before the end of set-aside
period.

You are requesting the set aside to encourage commitments from other donors to meet the
total renovation cost amount, monitor the progress of the project, distribute funds
appropriately, and ensure efficient management of the project.

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. 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