A private foundation may set aside funds for a planned art museum

Plain-English summary

A private foundation planned to create a museum for contemporary studio art glass in a recently purchased building. The artwork was tied up in an estate, and renovating the building or finding an alternative location was expected to take several years. The foundation asked to reserve additional funds for the project instead of making an immediate qualifying distribution. The IRS approved the set-aside under section 4942(g)(2) because the long-term museum project could be better accomplished by accumulating funds over time. The reserved amount must be paid for the project within 60 months after the first set-aside, and the foundation must document the obligation in its records.

Ruling snapshot

• Question: May the foundation treat funds reserved for a multi-year museum project as a qualifying distribution?
• Outcome: approved (the set-aside must be spent within the required 60-month period)
• Key authorities: IRC §§ 170(c)(2)(B), 4942(g)(2), 4942(e)(1)(A), 4942(f); 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

                                                            Employer Identification Number:
Date: March 10, 2020

                                                            Contact Person - ID Number:
Number: 202023011
Release Date: 6/05/2020

                                                            Contact Telephone Number:

LEGEND                                                     UIL

w dollars = Amount                                        4942.03-07
x dollars = Amount
Y = Individual

Dear                  :

Why you are receiving this letter

This is our response to your June 18, 2019 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 formed pursuant to a trust agreement to establish a museum for
contemporary studio art glass as well as to educate the public about studio art
glass and about the use of glass as an artistic medium.

You recently purchased a building which you plan to convert into a museum to
display artwork you will eventually receive from the estate of Y. However, the
receipt of the artwork is currently delayed because of the amount of time it is
taking to settle Y’s estate. Additionally, the Y estate is currently involved in legal
issues that has prevented the assets from being distributed.

In the meantime, you estimate that the remodeling and refurbishment of the
building will take approximately 24-48 months. You are consulting with architects
regarding the renovation and refurbishment of the building and this may ultimately
lead to a decision that the proposed location is too costly to renovate. In that case,
you will continue to pursue various venues to accommodate a museum including
the possibility of leasing a space to build out an exhibit for the artwork. Amounts
set aside will be expended to facilitate either scenario.

You previously set aside w dollars for this project. This request consists of an
additional w dollars to be set aside during 20[redacted] to be paid for the project no later
than December 31, 20[redacted]. Current projections estimate the costs to renovate the
building at x dollars. You may also need additional set-asides in similar amounts in
20[redacted] and 20[redacted]. You do not anticipate needing funding from any additional sources
to complete the project.

You have cited various reasons for requesting the set-aside, including the delay of
the administration of Y’s estate which is distributing the artwork to you, as well as
the amount of time it may take to renovate and convert the building you purchased
for the museum. In addition, if this location and building is not feasible, you may
have to find an alternative location, and work with architects on suitable plans.

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

Enclosure