202032005: IRS approves a private foundation set-aside for a historic building restoration

Plain-English summary

A private foundation requested approval to set aside funds for a matching grant to an organization that owned and maintained a historic building. The recipient planned to restore the building's historic appearance and create infrastructure for agriculture, horticulture, humanities, and outreach programs. The foundation's grant would cover about one-third of the project cost, with the recipient required to raise the rest and meet specified planning, contracting, and funding conditions. The IRS agreed that delaying payment would help the recipient raise matching funds and manage the long-term restoration. It approved the set-aside under IRC § 4942(g)(2), provided the amount was paid within 60 months after the first set-aside. The foundation also had to record the set-aside as a pledge or obligation and account for it under the private-foundation income rules.

Ruling snapshot

• Question: Could the private foundation treat funds reserved for a conditional historic-restoration matching grant as an approved set-aside?
• Outcome: approved (the amount had to be paid within 60 months after the first set-aside)
• Key authorities: IRC §§ 170(c)(2)(B), 4942(e)(1)(A), 4942(f), 4942(g)(2); Treas. Reg. § 53.4942(a)-3(b)(1), (2); Rev. Rul. 74-450

Full text (IRS public release)

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

Number: 202032005
Release Date: 8/7/2020

Date: May 12, 2020

Employer Identification Number:

Contact Person - ID Number:

Contact Telephone Number:

LEGEND:                                        UIL:
                                               4942.03-07
B = organization
C = location
D = date 1
E = date 2
F = date 3
G = date 4
H = date 5
x dollars = amount
y 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 are requesting the advance approval of a set-aside of x dollars for B, who
owns and maintains C. B will use the funds to restore C’s historical appearance
consistent with preservation standards, including interior and exterior renovations.
The ultimate goal is to return the building to its historic appearance and provide
the infrastructure for safe agriculture and horticulture interpretation, humanities
programing, and extended outreach of B. The total cost of the project is estimated
to be approximately y dollars.

Your grant is the subject of an agreement between you and B. Pursuant to the
terms of the agreement, you will make a matching grant of x dollars to B to fund
approximately one-third of the estimated cost of the project if certain conditions
described in the agreement are satisfied. It is anticipated that the remaining two-
thirds of the cost of the project will be funded by donations and grants made to B
as a result of fundraising activities undertaken by them in response to your
matching grant challenge.

If B satisfies the terms of the agreement, you will distribute the funds to them
within 21 business days. They must use the funds solely for reimbursable costs
actually incurred by B for labor, materials, fees and permits for the project,
including the labor, materials and other items described in the connection with
the project and for no other purpose.

Your obligation to make the grant to B is subject to the following conditions:

• On or before H, B shall have received the minimum eligible matching
  contributions, approximately two thirds of the project cost and shall have
  provided to you evidence that the eligible matching contributions have been
  received;

• On or before D, B shall have engaged an architectural or contracting firm as
  the supervising architect or construction manager for the restoration of the D;

• On or before E, B shall have submitted to you the drawings, plans and
  specifications for the project;

• On or before F, you shall be satisfied that B has sufficient funding to
  complete the project.

• Prior to disbursement of any portion of the funds, B shall have received
  from you written approval on the contractor, vendor or other supplier and
  all finally awarded contracts exceeding 5% of the total project costs for the
  labor and/or materials.

Payment must be made not later than G (21 business days after the latest
possible date for satisfaction of the specified conditions), which is less than 60
months from the date of the set-aside.

The grant is better used as a set-aside to allow for B to raise the needed matching
funds to satisfy the agreement, and also allows for B to exert control of the long
term project.

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