Foundation may set aside funds for a public garden expansion

Plain-English summary

A private foundation devoted to city beautification wanted to expand a public garden into an adjacent parking lot and relocate and rebuild a bandstand used for free concerts. The project required public coordination, fundraising, design, bidding, and construction over as much as three years. The foundation proposed setting aside part of the projected cost while seeking matching support from other foundations and possibly the city. The IRS found that the long-term project could be accomplished better through a set-aside than through immediate payment. It approved the set-aside under section 4942(g)(2), provided the amount is paid within 60 months after the first set-aside.

Ruling snapshot

• Question: Could the foundation treat funds reserved for a multi-year public garden expansion as a qualifying distribution?
• Outcome: Approved, with payment required within the statutory 60-month period.
• Key authorities: IRC §§ 170(c)(2)(B), 4942(g)(2), 501(c)(3), and 509(a); 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

Number: 201522007 Employer Identification Number:
Release Date: 5/29/2015
Contact Person - ID Number:

Date: 3/3/2015 Contact Telephone Number:

Legend: UIL: 4942.03-07
$x = dollar amount
$y = dollar amount

Dear :

Why you are receiving this letter

This is our response to your December 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

Your sole purpose is the beautification of your city through the landscaping of
school, parks, churches, roadways, and other public sites. Your most significant
beautification project to date was the construction of a public garden that is
adjacent to one of the city’s most historic structures.

Adjacent to the public garden is a parking lot. You believe the public would benefit
if the garden is expanded to include the parking lot. This expansion would involve
the re-location and re-construction of a popular band stand located nearby. The
band stand is being used for free public concerts.

The initial cost projections total $x. You intend to set aside $y of the proposed
budget. You would like to raise the necessary funds through a matching campaign
with local private foundations and possibly, a grant from the city government.

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This expansion project will require up to three years in meeting with all interested
parties, obtaining a consensus on design and budget, raising funds, final design,
bidding, and construction. Therefore, it is better to accomplish your project by a
set-aside rather than an immediate payment of funds. There are no planned
additions to the set-aside after the initial establishment.

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.

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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