Set-aside for a second disability group home is approved

Plain-English summary

A private foundation requested approval to set aside funds for a second group home serving people with a named syndrome and other developmental disabilities. The foundation needed time to study local demographics, select an effective location, purchase a suitable property, and complete building-code and accessibility modifications. It expected the project to take no more than two years and represented that the set-aside would be spent within 60 months. The IRS found that the project could be accomplished better through a set-aside than by immediate payment. It approved the program under section 4942(g)(2), allowing the set-aside to be treated as a qualifying distribution if the payment deadline and other requirements were met.

Ruling snapshot

• Question: Could the foundation use a section 4942(g)(2) set-aside to fund a second group home?
• Outcome: Approved, with payment required 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:

Number: 201512002
Release Date: 3/20/2015 Contact Person - ID Number:

Contact Telephone Number:
Date: 12/23/2014

LEGEND UIL LIST:
4942.03-07

X = City

Y = Name

b dollars = Amount
c dollars = Amount
d dollars = Amount

Dear :

Why you are receiving this letter

This is our response to your June 27, 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 have requested approval of a set-aside of b dollars for the taxable year
ending June 30, 20 _ for the purpose of funding a second group home in the
greater X area for individuals with Y syndrome and other developmental
disabilities. You currently operate one group home and you are moving forward
with your goal of opening more homes to serve these individuals. The second
home is projected to cost c dollars and requires up to d dollars of modifications to
meet applicable building code requirements and to modify the property to serve
the special needs of the residents.

2

Your project is better accomplished through a set-aside rather than through an
immediate payment of funds because you must research the demographics of the
greater X area to determine the optimal location as well as identify, purchase and
renovate an appropriate property. The process for the first group home took
approximately 20 months and you anticipate the second home will take no more
than two years. Although you currently have sufficient funds to purchase a
property, the set-aside will allow additional time to perform due diligence to ensure
that the location chosen is one that will maximize its proximity to a population of
individuals who can be effectively served by this type of facility.

One of your foundation managers has provided a written statement that the b
dollars set aside will actually be paid for the project within 60 months after 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
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).

3

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