IRS approves a private foundation's training-center set-aside

Plain-English summary

A private foundation that helps economically disadvantaged youth planned to build a training center while continuing its scholarship program. The project required land acquisition, construction, local approvals, a branch office, and several years of accumulated funding. The IRS concluded that this long-term project could be better accomplished through a set-aside than by immediate payment and approved the program under section 4942(g)(2). The foundation must pay the set-aside amount within 60 months after the first set-aside and account for the set-aside and its income as described in the letter.

Ruling snapshot

• Question: May the private foundation accumulate funds for a multiyear training-center project through a section 4942 set-aside?
• Outcome: approved, with payment required within 60 months after the first set-aside
• Key authorities: IRC §§ 170(c)(2)(B) and 4942(g)(2); Treas. Reg. § 53.4942(a)-3(b); Rev. Rul. 74-450

Full text (IRS public release)

Transcriber's note: this document is a scan. Obvious OCR errors in the legend and redacted blank spaces were corrected by comparison with all three page images. The wording is otherwise preserved verbatim.

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

Employer Identification Number:

Number: 202005027
Release Date: 1/31/2020 Contact Person - ID Number:

Contact Telephone Number:
Date: November 4, 2019

LEGEND
B = Country
C = University

D = City, Country
E = Type of University

F = District

G = Head of Government District
H = Bank

J = Nationality

x dollars = amount
y dollars = amount

UIL
4942.03-07

Dear                         :

Why you are receiving this letter

This is our response to your December 31, 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

Your mission is to help economically disadvantaged youth in B and the United
States. This mission has been quantified over the years into two parts:


1. Providing scholarships to deserving students enrolled in C, and

2. Training high school students, initially from D, to prepare and compete for
admissions into an E, of which there are       in B.

The training you conduct requires a training center to be developed in D. You have
requested a set-aside for this project. Several steps will need to be accomplished
including land acquisition, building and development of a training infrastructure,
and setting up a branch office. Land will likely require substantial funding;
however, you expect land to be contributed by the local or state government of F
and have put in a request to the G. Training infrastructure will take       years once
the land is donated or purchased. You plan to secure H approval for your branch
office and create a J non-profit organization so that you can solicit local funding.

If land is donated by the F government, you will need approximately x dollars to
complete the training center. You estimate approximately       years to accumulate
the required funds (y dollars per year), with construction beginning in the       year.

This project can be better accomplished by use of a set-aside. Purchasing the land
and beginning construction immediately would be a much more expensive
undertaking, require various approvals from D, and leave less funding for the first
objective of your mission (providing scholarships to deserving students enrolled in
C). The training center project does not remove your obligation to fund these
scholarships on an ongoing basis.

Your founders and manager certify that the training center project is imperative to
accomplish the second objective of your mission. You are requesting to set aside
funds over the next       years at approximately y dollars per year (a total of x dollars)
to be spent during years       and       to develop the training center.

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
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