Foundation's campus construction set-aside is approved

Plain-English summary

A private foundation requested approval to set aside funds toward construction of a campus for a tax-exempt college and the surrounding community in an economically depressed area. The multiyear project involved design, permitting, construction, furnishing, and payments as work was completed, so the foundation explained that immediate payment was impractical. The IRS found that the project met section 4942's suitability test because it could be better accomplished through a set-aside than an immediate distribution. It approved the set-aside, provided the amount is paid within the required 60-month period. The foundation must document the obligation in its records and account for the set-aside in its minimum investment return and adjusted net income calculations.

Ruling snapshot

• Question: May the private foundation treat funds reserved for campus construction as a qualifying set-aside?
• Outcome: Yes, provided the set-aside is paid within 60 months after the first set-aside.
• Key authorities: IRC §§ 170 and 4942; 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

Employer Identification Number:

Number: 201606033
Release Date: 2/5/2016 Contact Person - ID Number:

Contact Telephone Number:
Date: November 11, 2015

LEGEND UIL: 4942.03-07

B= City
C= College Name
D= Street Names

x dollars = Amount
y dollars = Amount

Dear                  :

Why you are receiving this letter

This is our response to your July 21, 2015 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 x dollars for the taxable year ending
December 31, 2015 to partially fund the construction of a campus in B for the
benefit of C which is a 501(c)(3) organization and for the surrounding community.
The project will be located in an economically depressed area that has been
identified by the federal government as having areas of deep poverty where
people have lacked the resources and other supports to break the cycle of
poverty. Construction of the campus is anticipated to begin during the fall of 2016
and be completed by December 2020. The anticipated total cost of the entire
project is y dollars. There are no planned additions to the set-aside.

The building is to be constructed on two acres of property located at D Streets in B
and is expected to be a multi-story building, with classrooms, student facilities,
educational training facilities and other types of educational facilities typically
associated with a campus.

The construction of the campus is better accomplished by a set-aside of x dollars
rather than the immediate payment of such funds. Current spending for the
construction of the facility is not possible because the activities involved in the
construction of the campus, including design, permit and approval process,
construction and furnishing, in planning, designing and constructing the facility will
take place over a period of several years. Moreover, as is customary and
appropriate in the construction of a building, payments will be made by you on an
“as work is done” basis, which will promote the proper and timely completion
rather than immediate payment.

You have provided a statement that the amount to be set-aside will be paid by
December 31, 2020 and will end not more than 60 months after the date of the first
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).

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,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure