IRS approves a science foundation's multi-year set-aside to fund building a new telescope and observatory

Plain-English summary

A private foundation generally must pay out a minimum amount each year (its "qualifying distributions") or face an excise tax. Section 4942(g)(2) lets a foundation instead "set aside" money for a specific project and still count it as a qualifying distribution, provided the funds are paid out within five years and the project is one better accomplished by saving up than by paying immediately. The foundation here runs science education and astronomical research and is upgrading its facility with a new specially designed telescope and observatory building that will take years to fabricate and construct. It asked the IRS to approve an additional set-aside for this project (adding to one previously approved). The IRS approved the set-aside under § 4942(g)(2), applying the "suitability test," because the multi-year construction requires long-term expenditures exceeding a single year's income, like the park-construction project blessed in Rev. Rul. 74-450. The set-aside must be paid within 60 months of the first set-aside, and the amounts count toward the foundation's minimum investment return and adjusted net income. The practical effect is that the foundation can bank money now for the observatory without triggering the tax for failing to distribute it currently.

Ruling snapshot

• Question: Should the IRS approve the private foundation's § 4942(g)(2) set-aside to fund a multi-year telescope and observatory construction project?
• Outcome: approved
• Key authorities: IRC § 4942(g)(2)(A), (B)(i); 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: 202049004
Release Date: 12/4/2020
                                               Employer Identification Number:
Date: September 8, 2020
                                               Contact Person - ID Number:

                                               Contact Telephone Number:




LEGEND                                         UIL
B = Name of State                              4942.03-07
C = Name of Organization
D = Name of Entity
F = Name of Project
G = Name of Center
H = Name of University
J = Name of Consortium
K = Name of Entity
m dollars = Amount
n dollars = Amount
P = Year
q dollars = Amount
r dollars = Amount
S = Year
t dollars = Amount
W = Year
X = Year

Dear           :

Why you are receiving this letter
This is our response to your December 10, 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 B around W and are recognized as an
organization described in Internal Revenue Code Section 501(c)(3) and as a
private foundation within the meaning of IRC Section 509(a).

You provide education in             to the citizens of B and scientific grade
              research. You host many school and youth groups and provide
various public programs. In the area of scientific research, you have worked with D
and other institutions and are presently the headquarters of F, G in partnership
with H and a member of J.

To keep current in astronomical research, you have embarked on a project to
upgrade your facility with a modern,                            and specially
designed                        to house the           at C. The telescope and
observatory building will be fabricated by K and take approximately      years to
complete.

The cost of the new                                      will be approximately m to
n dollars. Funding will come from you and from outside sources. To start the
funding process, you requested a set-aside in P of q dollars for which we
previously approved. In S, you spent r dollars of the q dollars set aside for this
project related to engineering costs, pre-construction permits/licenses and
preordering of                   .

For S, you requested an additional t dollars in set-aside for this project. The actual
construction will start in X. At that time, there will be numerous expenses for
contracts that have been already set in place.

K estimates the fabrication of the                                       will take
approximately        years from the time construction breaks ground in X. An
additional year will be required for the on-site work of constructing the foundation
for the                       and erecting the            .

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: Notice 437