Museum expansion set-aside approved as a qualifying distribution

Plain-English summary

A private foundation planned to expand and improve an art museum facility that it owned and leased to an exempt museum operator. The project required more funds than the foundation's current annual income, and the foundation could not borrow enough to cover all construction costs immediately. It proposed accumulating annual endowment income over five years and financing the remaining cost with a construction loan. The IRS approved the set-aside under section 4942(g)(2) because the long-term project was better accomplished by accumulating funds than by making an immediate payment. The foundation had to spend the set-aside within 60 months after the first set-aside and account for the amounts and related income under the applicable minimum-distribution rules.

Ruling snapshot

• Question: Could the foundation treat funds accumulated for a multiyear museum expansion as a qualifying set-aside?
• Outcome: approved (the set-aside had to be paid within the required 60-month period)
• Key authorities: IRC §§ 170(c)(2)(B) and 4942(e), (f), and (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

Number: 202017036
Release Date: 4/24/2020 Employer Identification Number:

Date: January 30, 2020
Contact Person - ID Number:

Contact Telephone Number:

LEGEND UIL

M = Name 4942.03-07
x dollars = Amount

y dollars = Amount

z dollars = Amount

Dear

Why you are receiving this letter

This is our response to your October 11, 2018 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 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 plan to expand and improve an existing art museum facility you own at an
estimated total cost of x dollars. The facility is leased to and operated by M, which
is recognized as exempt under IRC Section 501(c)(3), and the project will include
the addition of gallery space to the facility. It is expected that construction will take
12-18 months.

You are requesting a set-aside because you do not have sufficient income to
make an immediate payment of the funds necessary to pay for the improvement,
and you are unable to obtain a loan to pay for all construction costs. Your
endowment generates annual income of approximately y dollars, which you will set
aside in each fiscal year of a five-year period to accrue the funds necessary to pay
for a portion of construction costs. The balance of z dollars-- the difference

between the estimated cost of construction and the total amount you will set-aside--will be financed with a construction loan.

You attested that all income earmarked and set aside under the proposed plan will
be fully expended within a five-year period commencing with the date of your initial
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.

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