Approval to set aside a matching grant for a historic-building restoration

Plain-English summary

A private foundation wanted to earmark money now for a project it will pay for later. Private foundations must give away a minimum amount each year, and cash actually paid out counts toward that requirement; a "set-aside" under Section 4942(g)(2) lets the foundation instead reserve funds for a specific project and still get credit, as long as the money is paid within five years and the project is better done with a set-aside than an immediate payout. Here the foundation pledged a matching grant to a county (a governmental unit) to help restore a century-old, National Register historic building that needs exterior repairs and accessibility upgrades. The grant funds about one-third of the project cost and pays out only after the county raises matching funds and meets other conditions, which lets the foundation both spur community donations and keep quality control over the historic restoration. The IRS approved the set-aside under Section 4942(g)(2), finding the project satisfies the "suitability test," so the reserved amount counts as a qualifying distribution and must be paid within the 60-month window.

Ruling snapshot

• Question: May the foundation set aside a matching grant for a multi-year historic-restoration project and treat it as a qualifying distribution under § 4942(g)(2)?
• Outcome: approved
• Key authorities: IRC § 4942(g)(2)(A) and (B)(i); 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: 202043010
Release Date: 10/23/2020
Employer Identification Number:

Date: July 28, 2020
Contact Person - ID Number:

Contact Telephone Number:

LEGEND UIL: 4942.03-07
B = State

C = County

D = Individual

E = Building

F = City

G = State

H = Date

s dollars = Amount
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 formed under the laws of the State of B. You wish to set aside a grant
totaling s dollars for C. C is a governmental unit as described in Section 170(c)(1)
of the Code. C owns and maintains the historic E located in F, G. The E was built
in the style by master architect D. The E is on the

National Register of Historic Places. The E has served its original intended use
continuously for more than 100 years. Today, the E is in need of exterior repairs to
prevent further deterioration to the structure and in need of accessibility
improvements.

C has proposed a restoration project to, among other things, restore the exterior of
the E and make accessibility improvements consistent with the historic
preservation standards (the “Project”). The total cost of the Project is estimated to
be approximately t dollars. The ultimate goals of the Project are to protect and
preserve a regionally significant building that plays an important role in C’s social
and cultural heritage and to create ease of access to county services for all
residents.

Your grant is the subject of a grant agreement between you and C (the
“Agreement”). Pursuant to the terms of the Agreement, you will make a matching
grant of s dollars to C 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 costs 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 your matching grant challenge.

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 project account. Subject to the satisfaction of all of the conditions of the
Agreement, C may make disbursements from the Project Account to pay
reimbursement 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.

You stated that 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. With regard to 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 E, grants from the community at large
must form an essential and significant part of the Project funding. Through the
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.

With regard to the maintenance of quality control, you believe it is crucial that you
retain a degree of control over the renovation process because of your concern
with the preservation of the historical features of the E. By making the

disbursement of the funds dependent upon approval of outside consultants and

contractors and of drawings, plans, and specifications of the Project, you believe
you can best meet the goal of restoring the E and assure that the final restoration
Project is consistent in scope and concept with the Project originally submitted to

you by C.

Per the Agreement, payment of the grant will be made within 21 business days
after the conditions of the Agreement are satisfied. Accordingly, payments must be
made not later than H (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.

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