Museum construction set-aside received advance approval

Plain-English summary

A private foundation planned to build and operate a museum devoted to a continent’s culture and history. It requested approval to set aside funds because the multi-year design and construction work depended on volatile costs, coordination among contractors, and uncertainty over how another expansion project would affect the site. The foundation represented that the set-aside would be paid within 60 months. The IRS concluded that the project could be better accomplished through a set-aside than by immediate payment and approved the program under section 4942(g)(2).

Ruling snapshot

• Question: Could the foundation treat funds reserved for the museum’s multi-year construction as a qualifying set-aside?
• Outcome: approved, with payment required within the statutory 60-month period
• Key authorities: IRC §§ 170(c)(2)(B), 4942(g)(2); 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

Employer Identification Number:

Number: 201919017
Release Date: 5/10/2019 Contact Person - ID Number:

Contact Telephone Number:
Date: February 13, 2019

LEGEND UIL:

B= State 4942.03-07
C= Name
D= Continent
E= Name
F= Year
G= Year
H= Year

x dollars= Amount
y dollars= Amount

Dear

Why you are receiving this letter

This is our response to your December 20, 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

You were incorporated in the state of B. Your purpose is to create and then
operate C, which is a museum whose purpose is to inspire people to learn about
D’s culture and history. You are requesting the advance approval of a set-aside for
x dollars for F for the completion of C. The estimated amount needed to complete
C’s construction is approximately y dollars of which you have sufficient funding.

The planned facility for C consists of a free-standing multi-purpose structure that
will fit into the architectural landscape of the city business district and the city arts
district. The facility will house a permanent collection of pre-modern, modern,
contemporary art and artifacts as well as provide space for rotating and traveling
exhibitions and offer visitors immersive experiences using technology and kinetic
exhibits. The facility will also enable you to host artistic performances, film, food,
and cultural festivals, and public art demonstrations.

You anticipate the facility’s predesign and design phases to be completed by G.
Furthermore, you plan for the construction phase to be completed by H. Although
you may be able to estimate the costs involved in the planning and construction of
the facility for C, the actual costs are dependent upon the market prices of the
highly cyclical and volatile construction industry. Consequently, disbursements of
funds cannot be made in F and are expected to take place throughout the various
phases.

In addition, you had acquired one piece of land for C; however, before beginning
construction, you learned that the expansion of E may affect your original plans.
You subsequently contacted the Project Manager for E’s expansion to find out the
impact it will have on your planned facility for C. At that time, the Project Manager
indicated that E’s expansion would not affect the development plans for C. You
then acquired additional land in the vicinity of the first piece to ensure you would
have sufficient space for both C’s facility and for adequate parking. However, you
then learned that E’s expansion will significantly impact your development plans
for C but have not been able to definitively learn the details.

The development and construction of C can be better accomplished by a set-aside
for multiple reasons. These include the uncertain impact of E’s expansion on C.
Furthermore, the development and construction of C will require the use of
multiple outside parties working in a sequential order tied to the various phases of
the construction. Moreover, construction and land development projects by nature
are typically uncertain in relation to their actual costs and completion time. You
also need flexibility to fund the project because of the required coordination with
various contractors. The set-aside will also allow you to provide oversight over the
construction and enable you to make timely payments throughout the various
phases of construction as well as make needed adjustments concerning the
impact that the expansion of E has on the construction of C. Consequently, the
added flexibility through the set-aside greatly increases the practicality of making
payments to contractors, subcontractors, and others as well as making necessary
adjustments concerning any impact the expansion of E has on the construction.
You provided a statement that the latest possible date of the payment is no later
than 60 months after the date of your 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
considered 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 considered 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