IRS approves a private foundation set-aside for a classical dance and arts facility

Plain-English summary

A private foundation asked to set aside funds to acquire and develop a building for classical dance and arts programs. The facility would contain studios and educational space, house administrative work, and accommodate artists and teachers. The foundation was still evaluating properties and its future capacity needs, so it represented that the project could be accomplished more effectively through a set-aside than through an immediate payment. The IRS approved the program under IRC § 4942(g)(2) because it was a specific project satisfying the regulatory suitability test. The set-aside had to be paid within 60 months after the first set-aside.

Ruling snapshot

• Question: May the private foundation treat funds reserved for acquiring and developing its dance and arts facility as a qualifying distribution?
• Outcome: Approved
• Key authorities: IRC §§ 170(c)(2)(B) and 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

Date: December 8, 2020

Employer Identification Number:

Contact Person - ID Number:

Number: 202109009
Release Date: 3/5/2021

Contact Telephone Number:

UIL:4942.03-07

LEGEND
x dollars = Amount
y dollars = Amount
z dollars = Amount

Dear                  :

Why you are receiving this letter
This is our response to your December 30, 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. The funds will
be used to acquire and develop a building/facility to be used as a studio and
educational facility for purposes of developing and promoting classical dance
and the arts. The facility will house your administrative activities and will also
accommodate eminent artists and teachers.

You anticipate paying between y dollars and z dollars for the property. You are
evaluating and negotiating with a seller relating to a property. You have
identified a second potential site for acquisition to the extent that the current
target property negotiations do not result in a purchase.

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Although you plan on locating a property to purchase in the near-term, you
indicated that it would not be prudent to rush the process. The project can
better be accomplished by a set-aside due to the nature of identification ad
purchase of a suitable property. You want to ensure the property is suitable for
your charitable purposes and artistic endeavors. You want to carefully analyze
the capacity needs with respect to anticipated student population.

You do not anticipate that a study of your capacity needs will extend long into
the future. It is planned that the property will be acquired within a year but not
to exceed 60 months of your set-aside request.

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

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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

Enclosure