Private foundation's set-aside to convert a building into a museum is approved as a qualifying distribution

Plain-English summary

A private foundation normally has to pay out a minimum amount each year for charitable purposes, but instead of spending immediately it can "set aside" money for a specific long-term project and still have it count as a qualifying distribution, if the IRS approves and the money is paid out within five years. This foundation asked to set aside funds to convert a building it purchased into a museum that will eventually house artwork it expects to receive from an estate, where distribution of the assets is delayed by a dispute. The conversion is estimated to take 24 to 48 months and cost a stated amount. The IRS approved the set-aside under section 4942(g)(2), finding the museum conversion is a "specific project" better accomplished with a set-aside than an immediate payment (the suitability test), because it requires long-term expenditures spanning more than one year's income. The approved amount must be paid within the 60-month window. The ruling lets the foundation reserve money for the museum build-out without failing its annual payout requirement.

Ruling snapshot

• Question: May the private foundation treat funds set aside to convert a building into a museum as a qualifying distribution under section 4942(g)(2)?
• Outcome: Approved (set-aside approved; must be paid within 60 months)
• Key authorities: IRC §§ 4942(g)(2)(A) & (B), 170(c)(2)(B); 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

Release Number: 201904017 Employer Identification Number: Release Date: 1/25/2019 Date: November 2, 2018 Contact Person - ID Number:

Contact Telephone Number:

LEGEND UIL

w dollars = amount 4942.03-07
x dollars = amount

Y= individual

Z= government agency

Dear

Why you are receiving this letter

This is our response to your July 12, 2018, 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 purchased a building to convert into a museum to house assets you will eventually receive that are currently in the estate of Y. While the disposition of those assets is delayed due to a dispute with Z, you are working with architects to determine the efforts necessary to convert the building to a functioning museum. This is estimated to take 24 to 48 months, and require approximately w dollars.

It is currently unknown if additions to the w dollars being requested as the set- aside will be required. If so, you expect amounts of x dollars. That is not, however, being included at this time. You do wish to set-aside enough to cover the costs of future construction to take place within the next five years.

You have cited various reasons for requesting the set-aside, including artwork that will be distributed by Y’s estate that has not yet completed administration, ongoing legal issues with Z, future structural improvements to the museum location,

including possibly finding an alternative location, and consulting with architects on

those plans.

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.

If you have any questions, please contact the person listed in the heading of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure