Conservation land excluded from minimum investment return

Plain-English summary

A private operating foundation maintained undeveloped desert land adjoining its historic developed property. The land served as a security buffer for charitable and educational events, supported garden and bird tours and school conservation programs, and preserved native plants, wildlife habitat, and desert ecology. The foundation did not use the land to produce income or hold it as an investment. The IRS ruled that the land was used or held directly for the foundation’s charitable, scientific, and educational purposes, allowing the foundation to exclude its fair market value when computing the Section 4942 minimum investment return.

Ruling snapshot

• Question: Was the undeveloped land used or held directly for exempt purposes rather than for income production or investment?
• Outcome: Yes. Its value was excluded from the minimum investment return.
• Key authorities: IRC § 4942(e); Treas. Reg. § 53.4942(a)-2(c); Rev. Rul. 75-207; Rev. Rul. 76-204

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201829003 [Third Party Communication:
Release Date: 7/20/2018 Date of Communication: Month DD, YYYY]
Index Number: 4942.03-03, 4942.03-05,
4942.05-00, 4942.05-01 Person To Contact:
-------------------------, ID No. --------------
------------------------------------------------------------ Telephone Number:
----------------- ----------------------
------------------------------ Refer Reply To:
------------------------------------ CC:TEGE:EOEG:EO1
-------------------------------------------------- PLR-132929-17
Date:
April 24, 2018

Foundation = ------------------------------------------------------------------
Trust = -------------------------------------------------------------------------------------
------------
Date 1 = ---------------------------
Land = -----------------
Developed Land = --------------------------------------------
Undeveloped Land = --------------------------------------
A = -----------------------------------------------
B = ----------------------------------------------------------
C = ---------------------------------
D = ----------------------------------------------
E = -------------------------------------------------------------------------------------
---------------------------------------------------------------
F = -------------------------------------------------------------------------------------
------------------------------------------------

Dear ------------------------------:

This letter responds to a request for a ruling from your authorized representative dated
October 26, 2017, and subsequent correspondence, that certain land is held or used
directly in carrying out Foundation’s exempt purposes and, therefore, the value of such
property is excluded in computing the minimum investment return under § 4942(e) of
the Internal Revenue Code.1

FACTS

1
The Internal Revenue Code of 1986, as amended, to which all subsequent “section” references are
made unless otherwise indicated.
PLR-132929-17 2

Foundation is recognized as a tax-exempt organization described in § 501(c)(3) and is
classified as a private operating foundation within the meaning of § 4942(j)(3).
Foundation, was created pursuant to Trust, and in accordance to its terms, acquired on
Date 1, Land. Land is comprised of Developed Land and adjoining Undeveloped Land.
The Developed Land consists of a historic residence, a visitor and garden center,
cottages, and buildings for administrative offices, collections and archives, operations,
grounds, security, engineered wetlands, and storage that are used directly in
furtherance of Foundation’s exempt purposes. The Undeveloped Land consists of
desert property which Foundation maintains in its natural state, to preserve fragile plant
and wildlife ecosystems. Foundation represents that it is not using Undeveloped Land
for the production of income or for investment.

Trust provides that Foundation is organized and shall be operated exclusively for
charitable, scientific, literary, or educational purposes enumerated under § 170(c)(2)(B)
and at all times shall be operated in accordance with § 501(c)(3). In accordance to
terms of Trust, Foundation is required to use Developed Land to carry out certain
enumerated exempt educational and charitable permitted programs. Among the
enumerated exempt educational and charitable permitted programs is making
Developed Land available for A and B to --------------------------------------------------------------
---------------------------------------------------------------------------------and for A, C, D, and E and
F to meet -------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------. The other enumerated
exempt educational and charitable permitted programs allow for Developed Land’s use
by -----------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------Land; ---

---------------------------------------------------------------------------------------------------------.
Foundation does not charge any fees for use of its events space and cottages, and
allows public access to the visitor and garden center free-of-charge during open hours.

Since -------------------------, such as A and other -------------------, attend programs and
events at Land, providing a safe and secure environment is of paramount importance
and a necessity in order for Foundation to conduct its educational and charitable
activities at the Developed Land. Thus, Foundation hired a leading independent
security consulting firm, unrelated to it or any disqualified person with respect to it, to
evaluate the state of physical security at Land to identify concerns, vulnerabilities, and
to recommend security enhancements.

The security consulting firm prepared a letter and a report recommending the
Undeveloped Land be maintained in its present state, because its natural boundaries
PLR-132929-17 3

act as a buffer zone enhancing the safety and security at Land, thereby facilitating the
exempt purposes of Foundation. The letter states that the distance provided by
Undeveloped Land enhances Developed Land’s security and -----------------------------------
---------------------- and defend guests and employees of Foundation present on
Developed Land in cases where physical, biological, radiological, chemical, and human
threats may avail themselves. The letter concludes that the Undeveloped Land must be
preserved in its present natural state to facilitate the mission of Foundation. As further
explained in the accompanying report, Foundation’s guests include ---------------------------

---------------------------------------------------------- facilitating their attendance at events held
at Land. The report states that the buffer zone provided by the Undeveloped Land
enhances protection from ----------------------------------------------------------------------------------
-----------. The report also identifies areas where enhancements to safety and security
could be improved, most of which Foundation plans to implement.

Undeveloped Land also serves as an integral part of instructional discussions during
weekly garden and bird tours held at Developed Land. Foundation educates the public
by providing direct educational content with respect to the Undeveloped Land. One of
Foundation’s education program models is partnering with schools regarding
sustainable conservation and science education. Foundation represents that
Undeveloped Land in its natural state can be used as a study site. Undeveloped Land
does not require additional irrigation or maintenance and provides a visual of what the
desert looks like in an undeveloped natural state. Foundation anticipates allowing
students to design and carry out projects to collect information about the health of the
undeveloped ecosystems in the desert, thereby providing free content-driven programs
for schools and field experience for students.

In addition, Foundation represents that it’s maintenance of Undeveloped Land in its
natural desert state preserves a sustainable native environment that contributes to the
health of the community ecosystem. Parcels of land the size of Undeveloped Land are
very rare. The population growth and increased land development in the area continue
to push native plant species to the fringes of the desert, eliminating their access to the
desert floor and impeding their contributions to low desert blow sand ecology.
Undeveloped Land also provides habitat for a wide range of desert wildlife that naturally
occur, travel, and hunt in the area.

RULING REQUESTED

Foundation requests a ruling that the Undeveloped Land is held or used directly in
carrying out its exempt purposes and, therefore, that its value is excluded in computing
its minimum investment return under § 4942(e).
PLR-132929-17 4

LAW

Section 4942(a) generally imposes an excise tax on the undistributed income a private
foundation fails to distribute by the end of the following taxable year.

Section 4942(c) provides that “undistributed income” is the amount by which the
distributable amount exceeds the qualifying distributions (as defined by § 4942(g))
made out of such distributable amount.

Section 4942(d) defines “distributable amount” as an amount equal to the sum of the
“minimum investment return” plus the amounts described in § 4942(f)(2)(C), reduced by
the sum of the taxes imposed on the private foundation for the taxable year under
subtitle A and § 4940.

Section 4942(e)(1) defines the term “minimum investment return” as five percent of the
excess of the aggregate of fair market value of all assets other than those which are
used (or held for use) directly in carrying out the foundation's exempt purposes, over the
acquisition indebtedness (determined under § 514(c)(1) without regard to the taxable
year in which the indebtedness occurred). Thus, an organization may exclude
from its calculation of “minimum investment return”, the value of assets which are used
(or held for use) directly in carrying out the organization’s exempt purpose.

Section 4942(j)(3) provides that an operating foundation is any organization which
makes certain qualifying distributions directly for the active conduct of the activities
constituting the purpose or function for which it is organized and operated equal to
substantially all of the lesser of its adjusted net income or minimum investment
return. Additionally, substantially more than half of its assets must be devoted directly to
such activities or to a functionally related business, or both.

Treas. Reg. § 53.4942(a)-2(c)(2) states, in part, that the assets taken into account in
determining minimum investment return shall not include any assets used (or held for
use) directly in carrying out the foundation’s exempt purpose.

Treas. Reg. § 53.4942(a)-2(c)(3)(i) provides that an asset is “used (or held for use)
directly in carrying out a foundation's exempt purpose” only if the asset is actually used
by the foundation in carrying out the charitable, educational, or other similar purpose
which gives rise to the exempt status of the foundation. Consequently, assets which
are held for the production of income or for investment (for example, stocks, bonds,
interest-bearing notes, endowment funds, or, generally, leased real estate) are not
being used (or held for use) directly in carrying out the foundation’s exempt purpose,
even though the income from such assets is used to carry out such exempt purpose.
Whether an asset is held for the production of income or for investment rather than used
(or held for use) directly by the foundation to carry out its exempt purpose is a question
of fact.
PLR-132929-17 5

Treas. Reg. § 53.4942(a)-2(c)(3)(ii) gives examples of assets which are used (or held
for use) directly in carrying out a foundation’s exempt purpose. These may include real
estate used by the foundation directly in its charitable, educational, or other similar
exempt activities, and any physical facilities used in such activities, such as paintings or
other works of art owned by the foundation which are on public display.

Rev. Rul. 75-207, 1975-1 C.B. 361, describes a private foundation formed to further
conservation, education, and the arts. The foundation owns and maintains an island
dedicated to preserve the natural ecosystems and historical and archaeological remains
on the island that have no residential use, and access is limited to invited public and
private researchers. The ruling holds that the island is being used directly to carry out
the foundation’s exempt purpose in the manner indicated in the regulations under
§ 4942. Accordingly, the foundation may exclude the value of the island in computing
its minimum investment return under § 4942(e).

Rev. Rul. 76-204, 1976-1 C.B. 152, describes an organization formed by scientists,
conservationists, and other community representatives for the purpose of preserving the
environment. It accomplished this purpose by acquiring and maintaining (or transferring
to a governmental agency) ecologically significant undeveloped land such as swamps,
marshes, forests, wilderness tracts, and other natural areas. Generally, public access
to such land is limited so that the delicate balance of the ecosystem remains
undisturbed. In these situations the organization will allow educational and scientific
research or study, as long as such use will not disrupt the particular ecosystem. The
ruling concludes that the organization is enhancing the accomplishment of an express
national policy of conserving the nation’s unique natural resources and, in this sense, is
advancing education and science and benefiting the public in a manner that the law
regards as charitable. Furthermore, the restrictions on current access to the lands
maintained by the organization are essential to the preservation of their natural state,
and are therefore essential to the fulfillment of the organization’s charitable purpose.

ANALYSIS

As permitted under § 4942(e)(1)(A) and Treas. Reg. § 53.4942(a)-2(c)(2), when
computing a foundation’s “minimum investment return,” the fair market value of assets
used (or held for use) directly in carrying out the foundation’s exempt purposes are
excluded. Treas. Reg. § 53.4942(a)-2(c)(3)(i) further clarifies that the asset must
actually be used by the foundation in carrying out the charitable, educational, or other
similar purpose which gives rise to its exempt status, and cannot be held for the
production of income or for investment.

Preserving the Undeveloped Land in its natural state is essential to the fulfillment of the
charitable, scientific, and educational, exempt purposes of Foundation, and it is not
being held for the production of income, or for investment, but only to further the exempt
PLR-132929-17 6

purposes of Foundation. Maintaining the Undeveloped Land in its natural state
enhances security for the exempt “permitted programs” occurring on Developed Land.
In particular, as recommended by an independent security consulting firm, Undeveloped
Land serves as an important buffer zone which enhances Land’s security as well as the
ability of ----------------------------------- to protect and defend Foundation’s guests in cases
where physical, biological, radiological, chemical, and human threats avail themselves.
Given the -------------- nature of the events and guests that Foundation hosts on the
Developed Land, this buffer is essential to Foundation’s ability to further the exempt
charitable and educational “permitted programs” enumerated in the Trust.

In addition, Foundation includes discussions about Undeveloped Land and its
conservation efforts when providing weekly garden and bird tours at Developed Land,
and has education program models where it partners with schools on sustainable
conservation and science education. Undeveloped Land in its natural state provides a
study site for schools conducting conservation education.

Finally, preservation of Undeveloped Land in its natural desert state also serves
conservation purposes within the meaning of § 501(c)(3). Preservation of Undeveloped
Land contributes to sustainable conservation that improves the health of the community
ecosystem, like the organization described in Rev. Rul. 76-204, 1976-1 C.B. 361, and,
therefore, furthers charitable conservation purpose. Like the organization described in
Rev. Rul. 75-207, 1975-1 C.B. 361, Foundation is directly using Undeveloped Land in
carrying out its exempt purposes in the manner required under § 4942(e)(1) and Treas.
Reg. § 53.4942(a)-2(c)(3)(i).

For these reasons, Undeveloped Land is being used in directly carrying out
Foundation’s exempt purposes within the meaning of Treas. Reg. § 53.4942(a)-
2(c)(3)(i), and its fair market value should not be taken into account in determining
minimum investment return.

CONCLUSION

Based solely on the facts and representations submitted, we rule that Foundation may
exclude the value of Undeveloped Land in computing its minimum investment return
under § 4942(e) because it is used or held for use directly in carrying out its exempt
purposes.

The ruling contained in this letter is based upon information and representations
submitted by Foundation and accompanied by a penalty of perjury statement executed
by an appropriate party, as specified in Rev. Proc. 2018-1, 2018-1 I.R.B 1, § 7.01(16).

This office has not verified any of the material submitted in support of the request for
ruling, and such material is subject to verification on examination. The Associate office
will revoke or modify a letter ruling and apply the revocation retroactively if there has
PLR-132929-17 7

been a misstatement or omission of controlling facts; the facts at the time of the
transaction are materially different from the controlling facts on which the ruling was
based; or, in the case of a transaction involving a continuing action or series of actions,
the controlling facts change during the course of the transaction. See Rev. Proc. 2018-
1, § 11.05.

No ruling is granted as to whether Foundation qualifies as an organization described in
§ 501(c) or § 509(a), or whether Foundation is, or continues to be, an “operating
foundation” described in § 4942(j)(3). Except as expressly provided above, no opinion
is expressed or implied, concerning the federal income tax consequences of any
aspects of any transaction or item of income described in this letter ruling.

This letter is directed only to Foundation. Section 6110(k)(3) provides that it may not be
used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to each of Foundation’s authorized representatives.

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter.

                                   Sincerely,




                                   Mary Jo Salins
                                   Chief, Exempt Organizations Branch 1
                                   (TEGE Associate Chief Counsel)

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