IRS approves a private foundation's contingent set-aside for funds a court order barred it from distributing

Plain-English summary

A private foundation must pay out a minimum amount each year or face an excise tax on the money it holds back (Section 4942). Here the foundation could not make some of its required distributions because a court order, entered in litigation over money held in a trust, froze the funds until the court decides who is entitled to them. The regulations let a foundation "set aside" (formally earmark, rather than pay out) amounts it is barred from distributing by a court order, so those amounts count toward its payout requirement. The foundation asked the IRS to approve a contingent set-aside for the frozen amount. The IRS approved it under Treas. Reg. § 53.4942(a)-3(b)(9), ruling that the dollars the foundation would have distributed but for the court order qualify as a contingent set-aside for the tax year. The set-aside must actually be paid out by the last day of the tax year following the year the litigation ends; anything not distributed by then is pulled back into income. The foundation also must record the set-aside in its books and factor it into its minimum-investment-return and adjusted-net-income calculations.

Ruling snapshot

• Question: Do amounts a private foundation is barred from distributing by a court order qualify as a contingent set-aside under Treas. Reg. § 53.4942(a)-3(b)(9), so they count as qualifying distributions?
• Outcome: Approved (contingent set-aside approved; must be distributed by the year after the litigation ends)
• Key authorities: IRC § 4942(a), (c), (d), (g); Treas. Reg. §§ 53.4942(a)-2, 53.4942(a)-3(a)(2), 53.4942(a)-3(b)(8), 53.4942(a)-3(b)(9)

Full text (IRS public release)

Transcriber's note: this document is a scan. Per the runbook's proofreading duty, obvious OCR misreads have been corrected (e.g. "oidered" to "ordered", "(b)(Y)" to "(b)(9)", "| /0(c)(2)(B)" to "170(c)(2)(B)", and the garbled legend lines for the two date placeholders), wording is kept verbatim, and the IRS's redaction blanks (including the blank tax years shown as "20__") are preserved as gaps.

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

Date: December 22, 2021

Release Number: 202211010 Employer Identification Number:
Release Date: 3/18/2022

Contact person - ID number:

Contact telephone number:

LEGEND: UIL:

B = city/state 4942.03-07
C = business

D = date 1

E = date 2

F = bank

G = amount

J = trust

L = organization

Dear

Your letter dated November 13, 2020 requested approval of a contingent set-aside under
section 53.4942(a)-3(b)(9) of the Foundation Excise Taxes Regulations for the taxable year
ended December 31, 20__.

You have been recognized as exempt under section 501(c)(3) of the Internal Revenue Code
of 1986. You have also been recognized as a private foundation described in section 509(a)
of the Code.

Facts

Based upon the information furnished, your Contingent set-aside is approved under section
53.4942(a)-3(b)(9) of the Foundation Excise Taxes Regulations. As required under Section
53.4942(a)-2, the Contingent set-aside amount must be distributed by the last day of the
taxable year following the taxable year in which the litigation is terminated. Amounts not
distributed by the close of the appropriate taxable year shall be treated as described in
Section 53.4942(a)-2(d)(2)(iii)(c) for the succeeding taxable year.

Description of Set-Aside Request

On E, C filed a motion for Temporary Restraining Order and Injunction against F in the
Court for B. On D, the court ordered that F shall hold any distributions from J to
which C may now be, or in the future will be, entitled to pursuant to the terms of J until the
Court enters an order directing F to either disburse such funds to C or to disburse such funds
as the Court may otherwise direct. The court also ordered that F shall invest the funds held
pursuant to the Court's order in the same manner as the remainder of the corpus of J is
being invested and that F shall keep a separate accounting for any distributions that may be
due to C, pursuant to the terms of J. The court additionally ordered that B may continue to
make disbursements to its other beneficiary, L, in the ordinary course; however, such
distributions shall not include any amounts to which C is or will be entitled to should the
Court ultimately rule in its favor. The Court further ordered that all other matters are
reserved.

You stated that the set-aside amount for tax year 20__ is g dollars.

Law

Section 4942(a) of the Code generally imposes an excise tax on the undistributed income of a
private foundation for any taxable year which has not been distributed before the first day of the
second (or any succeeding) taxable year following such taxable year. For purposes of section
4942, the term "distributed" means distributed as qualifying distributions under section 4942(g).

Section 4942(c) defines "undistributed income" as the amount by which the distributable amount
for such taxable year, exceeds the qualifying distributions made before such time out of such
distributable amount.

As defined by Section 4942(d) the computation of the "distributable amount" for a taxable year is
the sum of the minimum investment return plus the amounts described in subsection (f)(2)(C),
reduced by the sum of the taxes imposed on such private foundation for the taxable year under
subtitle A and section 4940.

Section 4942(g)(1) of the Code defines "qualifying distribution" as any amount (including that
portion of reasonable and necessary administrative expenses) paid to accomplish one or more
purposes described in section 170(c)(2)(B), other than any contribution to (i) an organization
controlled (directly or indirectly) by the foundation or one or more disqualified persons (as defined
in section 4946) with respect to the foundation, except as provided in paragraph (3), or (ii) a
private foundation which is not an operating foundation (as defined in subsection (j)(3)), except as
provided in paragraph (3), or any amount paid to acquire an asset used (or held for use) directly in
carrying out one or more purposes described in section 170(c)(2)(B).

Section 53.4942(a)-2(d)(2)(iii)(c) of the Foundation and Similar Excise Taxes Regulations
includes in gross income for the taxable year any amount set aside under Section 53.4942(a)-3(b)
to the extent it is determined that such amount is not necessary for the purposes for which it was
set aside.

Section 53.4942(a)-3(a)(2)(iii) of the Regulations defines as a qualifying distribution, in relevant
part, to mean, any amount set aside within the meaning of paragraph (b) of section 3.

Section 53.4942(a)-3(b)(9) of the Regulations provides that if a private foundation is involved in
litigation and may not distribute assets or income because of a court order, the private foundation
may seek and obtain a set-aside for the purpose described in section 53.4942(a)-3(a)(2). The
amount to be set-aside shall be equal to that portion of the private foundation's distributable
amount which is attributable to the assets or income that are held pursuant to court order and
which, but for the court order precluding the distribution of such assets or income, would have
been distributed. In the event that the litigation encompasses more than one taxable year, the
private foundation may seek additional contingent set-asides. Such amounts must actually be
distributed by the last day of the taxable year following the taxable year in which the litigation is
terminated. Amounts not distributed by the close of the appropriate taxable year shall be treated as
described in Sec 53.4942(a)-2(d)(2)(iii)(c) for the succeeding taxable year.

Application of Law

While litigation is pending, a court order prevented you from making the distributions which are
the subject of the set-aside. These are the circumstances described in Section 53.4942(a)-3(b)(9)
of the Regulations.

Accordingly, we rule that g dollars, the amount which would have been distributed before
December 31, 20__, but for the Court's order precluding such distribution, qualifies as a
contingent set-aside described in Section 53.4942(a)-3(b)(9) for taxable year ending December 31,
20__.

This ruling is based on the facts as they were presented and on the understanding there will be no
material changes in the facts upon which it is based. Any changes that may have a bearing on your
tax status should be reported to the Internal Revenue Service. This ruling does not address the
applicability of any section of Code or regulations to the facts submitted other than with respect to
the sections described.

We direct your attention to Section 53.4942(a)-3(b)(8) of the Regulations, entitled "Evidence of
Set-Aside." This section provides that any set-aside approved by the Internal Revenue Service
shall be evidenced by the entry of a dollar amount in the books and records of a private foundation
as a pledge or obligation to be paid at a future date or dates. Further, the amount of the set-aside
must be taken into account in determining the foundation's minimum investment return (see
Section 53.4942(a)-2(c)(1) of the Regulations), and any income attributable to a set-aside must be
taken into account in computing adjusted net income (see Section 53.4942(a)-2(d) of the
Regulations).

Additional Information

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

This ruling will be made available for public inspection under Section 6110 of the Code after
certain deletions of identifying information are made. For details see the enclosed Notice 437,
Notice of Intention to Disclose. A copy of this ruling with deletions that we intend to make
available for public inspection is attached to Notice 437. If you disagree with our proposed
deletions, you should follow the instructions in Notice 437.

Please keep a copy of this ruling letter in your permanent records.

If you have any questions about this ruling, please contact the person whose name and telephone
number are shown above in the heading of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure