IRS approves a set-aside for a historic-site matching grant

Plain-English summary

A private foundation planned a matching grant to a governmental unit for restoring a property listed on the National Register of Historic Places. The project included historic restoration, safety work, and heating and cooling improvements designed not to damage the property. The grant would cover one-third of the estimated cost, with the governmental unit expected to raise the rest through a roughly three-year capital campaign prompted by the matching challenge. The IRS agreed that the matching arrangement and the need to preserve control over the long-term project made a set-aside more suitable than immediate payment. It approved the set-aside under section 4942(g)(2), provided the amount was paid within 60 months after the first set-aside and used under the stated project controls.

Ruling snapshot

• Question: Could the foundation treat the amount reserved for the historic-site matching grant as a qualifying set-aside?
• Outcome: approved (the set-aside qualified if paid within the required 60-month period)
• Key authorities: IRC §§ 170(c), 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

Number: 202025001
Release Date: 6/19/2020
                                                 Employer Identification Number:
Date: March 23, 2020
                                                 Contact Person - ID Number:

                                                 Contact Telephone Number:


LEGEND                                           UIL
B = State                                        4942.03-07
C = County, State
D = Location
E = Date
t dollars = Amount
u dollars = Amount

Dear           :

Why you are receiving this letter
This is our response to your August 23, 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 incorporated in the state of B. You wish to set aside a grant totaling t
dollars for C. C is a governmental unit as described in Section 170(c)(1) of the
Code. C has proposed a restoration project to, among other things, restore the D
consistent with the historic preservation standards, make safety improvements,
and make heating and cooling improvements that will not result in deterioration to
the D (the “Project”). The D is included on the National Register of Historic Places.
The total cost of the Project is estimated to be approximately u dollars. Once
completed, the Project will result in a restored and improved D that will positively
impact the community’s perception of their beloved D. The purpose of the grant is
to assist in funding the Project.
You have entered into an Agreement with C. Pursuant to the terms of the
Agreement, you will make a matching grant of t dollars to fund one-third of the
estimated cost of the Project. It is anticipated that the remaining two-thirds of the
cost of the Project will be funded by donations and grants made to C as a result of
fundraising activities undertaken by C in response to their matching grant
challenge.

The Project can be better accomplished by use of a set-aside. The purpose of the
grant requires the use of a matching-grant program and the preservation of control
over the long-term project, both of which can be better accomplished by use of a
set-aside. Regarding the matching-grant program, you believe that the program is
necessary to stimulate grants to C from the community-at-large. You believe that,
due to the extent and cost of the rehabilitation and restoration needed for the D,
grants from the community-at-large must form an essential and significant part of
the Project funding. Through your matching-grant program, you hope to encourage
other donors to support the Project. The approximate three-year period provided in
the Agreement to raise the necessary matching funds has been mutually agreed
by you and C as allowing sufficient time for C to complete its anticipated capital
campaign for the Project.

Under the terms of the Agreement, if C raises the matching funds and satisfies
certain other conditions of the Agreement, you will disburse the funds to C in a
lump sum within 21 business days after satisfaction of these conditions. Upon
receipt of the funds from you, C will deposit the funds in a separate interest-
bearing account (the “Project Account”). Subject to the satisfaction of all of the
conditions set forth in the Agreement, C may make disbursements from the Project
Account to pay reimbursable costs of the Project, provided that, unless otherwise
agreed by you, disbursements from the Project Account are limited to one-third of
the total reimbursable costs incurred in connection with the Project to the date of
disbursement. The Agreement further specifies that C must use your gift solely for
“reimbursable costs” incurred in connection with the Project and for no other
purpose.

The payment must be made to C no later than E, which is less than 60 months
from the date of the 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 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. 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
Enclosure