IRS approves a private foundation's set-aside to buy land and build transitional housing for abused women

Plain-English summary

Private foundations normally have to pay out a minimum amount each year, but they can "set aside" money for a specific long-term project and still get credit for it as a qualifying distribution, provided the IRS signs off in advance. Here a private foundation asked to set aside funds to buy land in its service area and build residential or modular homes to serve as transitional housing for women and children escaping domestic violence, with the foundation providing counseling and holding rent to return to residents when they leave. The IRS approved the set-aside under § 4942(g)(2), finding the project is the kind of long-term effort that is better accomplished by setting money aside than by paying it out immediately (the "suitability test"). The foundation must pay the set-aside amount within 60 months of the first set-aside. This matters because approval lets the foundation bank funds for a multi-year building project without failing its annual payout requirement or incurring excise tax.

Ruling snapshot

• Question: May the foundation treat funds set aside to buy land and build transitional housing as a qualifying distribution under § 4942(g)(2)?
• Outcome: approved
• Key authorities: IRC § 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: 202039021
Release Date: 9/25/2020

Employer Identification Number:
Date: June 29, 2020

Contact Person - ID Number:

Contact Telephone Number:

Legend:                                        UIL:
x dollars = amount 1                           4942.03-07
y dollars = amount 2

Dear

Why you are receiving this letter

This is our response to your letter postmarked December 20, 2019, 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

The set-aside amounts will be used to purchase land within the foundation’s
catchment area on which residential buildings or modular type homes will be
constructed.

The donor's intent was for the funds to be used for transitional housing for abused
women and their children who have been victims of domestic violence. The
foundation will provide treatment and/or counseling and collect a small rent from
the women. These rents will be saved and returned to them when they leave the
housing. A typical stay will be about a year.

It is anticipated the purchase of the land and building, depending on type of
structure (modular or permanent), will cost between x and y dollars.

Amounts will be paid no more than 60 months after the date of the set aside. At
this time, further set asides are not anticipated to be needed for this project. Funds
are better used as a set-aside to allow for the long term purposes of this 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.

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