Private foundation may set aside funds for facility renovations

Plain-English summary

A private foundation planned a multiyear renovation of its operating facility and requested approval to set aside funds rather than pay them immediately. The IRS approved the set-aside under section 4942(g)(2) because the project's scope and timing made it better suited to accumulated funding. Both set-aside amounts had to be paid within 60 months after the first set-aside. The foundation also had to record the amounts as pledges or obligations and account for them when calculating its minimum investment return and adjusted net income.

Ruling snapshot

• Question: Could the private foundation treat funds reserved for a multiyear facility renovation as qualifying distributions?
• Outcome: Approved, subject to payment within the required 60-month period.
• Key authorities: IRC §§ 4942(g)(2), 4942(e)(1)(A), and 4942(f); Treas. Reg. § 53.4942(a)-3(b); Rev. Rul. 74-450

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR against all three page images. Obvious OCR misreads were corrected, redacted identifiers are marked [redacted], and wording is otherwise verbatim.

Internal Revenue Service                         Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Number: 201905007                                Employer Identification Number:
Release Date: 2/1/2019                           [redacted]

                                                 Contact Person - ID Number:
Date: November 9, 2018                           [redacted]
                                                 Contact Telephone Number:
LEGEND                                           [redacted]
W= location                                      UIL:
X= year                                          4942.03-07
Y= year
Z= years
d dollars= amount
e dollars= amount

Dear [redacted]:

Why you are receiving this letter

This is our response to your December 18, 2017 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 board resolved that you would renovate your operating facility at W. As a
result, you have engaged various professionals to determine proper renovations
including the time and costs associated with undergoing this project.

You are requesting a set-aside of d dollars for X and e dollars for Y. You propose
that the set-aside of d dollars will be paid in Y and the set-aside of e dollars will be
paid during Z. Both set-asides are proposed to be paid within 60 months of the
date of the first set-aside.

You indicate the project can be better accomplished by a set-aside rather than an
immediate payment of funds due to the scope of the project not being completed
in a one or two-year time frame.

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