IRS approves set-aside for historic university building restoration

Plain-English summary

A private foundation proposed setting aside funds for the rehabilitation and repair of an uninhabitable historic building that a public university planned to use. The grant would cover about one-third of the estimated project cost, while a university-support organization would have to raise matching funds for the remainder. Payment depended on fundraising, proof of sufficient funds, review of project plans, and use of the grant only for direct restoration costs. The foundation explained that a multi-year set-aside would allow time for the capital campaign and preserve quality control over the historic restoration. The IRS approved the set-aside under section 4942(g)(2), subject to payment within 60 months after the first set-aside.

Ruling snapshot

• Question: May the foundation treat funds reserved for a matching-grant historic building restoration as a qualifying distribution?
• Outcome: approved
• Key authorities: IRC §§ 170(c)(2)(B), 4942(e), 4942(f), and 4942(g)(2); Treas. Reg. § 53.4942(a)-3(b)

Full text (IRS public release)

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

Number: 202009030 Employer Identification Number:
Release Date: 2/28/2020

Contact Person - ID Number:
Date: December 4, 2019

Contact Telephone Number:

Legend: UIL:

x dollars = Amount 4942.03-07
M = Name

N = Name

y dollars = Amount

B = Date

C = Date

D = Date

E = Date

Dear

Why you are receiving this letter

This is our response to your March 26, 2019 letter requesting approval of a set-
aside under Internal Revenue Code IRC Section 4942(g)(2). You've been
recognized as tax-exempt under IRC Section 501(c)(3) and have been determined
to be a private foundation under IRC Section 509(a).

Our determination

Based on the information furnished, your set-aside program is approved under
IRC Section 4942(g)(2). As required under IRC 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 requested approval of a set-aside of x dollars for the taxable year ending
December 31, , for the purpose of funding the rehabilitation and repair of a
building M, a public university, plans to use. You will distribute the funds to N,
which raises funds in support of M.

The building is currently uninhabitable and in urgent need of rehabilitation and
repair. The project will include interior, exterior, structural, plumbing, electrical, and
abatement work consistent with historic preservation standards. The total cost of

the project is estimated to be approximately y dollars. The goal is to make the
building a habitable structure that can be used and enjoyed by students and
faculty of M and the community while maintaining and preserving its historic
significance.

Your grant is the subject of a grant agreement between you, M, and N. Under the
terms of the agreement, you will make a grant of x dollars to N to fund
approximately one-third of the estimated cost of the project if certain conditions are
Satisfied. Those conditions include:

• On or before B, N must receive matching contributions to fund
approximately two-thirds of the project cost and submit evidence of same to
you,

• On or before C, N must submit to you the drawings, plans, and
specifications for the project and give you a reasonable amount of time to
review and comment on the plans:

• On or before D, N must provide you with satisfactory assurances that it has
sufficient funds to complete the project;

• N must agree to use the funds solely for direct costs incurred by M to
procure labor, materials, fees, permits, and other similar items for the
project.

If N satisfies the terms of the agreement, you will distribute the funds to it within 21
business days.

The project can be better accomplished by use of a set-aside because the grant
requires the use of a matching-grant program and the preservation of control over
the quality of the project. Regarding the matching-grant program, you believe that,
due to the extent and cost of the rehabilitation and restoration needed for the
building, grants from the community must form an essential and significant part of
the project funding. Through the matching-grant program, you hope to encourage
other donors to support the project. The approximate three-year period provided in
the project agreement to raise the necessary matching funds has been mutually
agreed by the you and and N as allowing sufficient time for N to complete its
anticipated capital campaign for the project.

In terms of quality control, it is important that you retain a degree of control over
the renovation process because you wish to preserve the historical features of the
building. By making the disbursement of the funds dependent upon approval of
outside consultants and contractors and of drawings, plans, and specifications of
the project, you believe you can best meet the goal of restoring the building and
assure that the final restoration project is consistent in scope and concept with the
project N originally submitted to you.

Payment must be made not later than E, which is fewer than 60 months from the
date of the set-aside.

Basis for our determination

IRC Section 4942(g)(2)(A) states that an amount set aside for a specific project,
which includes one or more purposes described in IRC Section 170(c)(2)(B), may
be treated as a qualifying distribution if it meets the requirements of IRC Section
4942(g)(2)(B).

IRC Section 4942(g)(2)(B) 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.

IRC Section 4942(g)(2)(B)(i) 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.

Treasury Regulation Section 53.4942(a)-3(b)(1) 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 Treas. Reg.
Section 53.4942(a)-3(b)(2).

Treas. Reg. Section 53.4942(a)-3(b)(2) 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
IRC 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 IRC 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 IRC Section 4942(f).

Additional information

This determination is directed only to the organization that requested it. IRC
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. We have sent a copy of this letter
to your representative as indicated in your power of attorney.

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