IRS approves a private foundation's set-aside to fund construction of a youth center

Plain-English summary

A private foundation asked the IRS to approve a "set-aside." Private foundations normally must pay out a minimum amount for charitable purposes each year, but section 4942(g)(2) lets a foundation instead earmark ("set aside") money for a specific project and still count it toward that payout requirement, so long as the money is actually spent within 60 months and the project is one better accomplished by saving up than by paying immediately. This foundation, which serves needy children (with a preference for a specific group of beneficiaries) by supporting foster care, housing, education, and healthcare, is building and renovating a youth center that will offer arts, sports, creative media, culinary arts, and entrepreneurship programs. It requested a set-aside for the construction/renovation costs, on top of a set-aside already approved for an earlier year, and does not expect to add more. The IRS approved the request because a multi-year construction project of this kind fits the "suitability test" (long-term expenditures that take more than one year's income to complete), citing Rev. Rul. 74-450, where a foundation's set-aside for a multi-year public-park construction contract qualified. The foundation must document the set-aside as a pledge, pay it out within 60 months of the first set-aside, and factor the amounts into its minimum-investment-return and adjusted-net-income calculations.

Ruling snapshot

• Question: May a private foundation treat funds earmarked for the multi-year construction/renovation of a youth center as a qualifying distribution set-aside under IRC § 4942(g)(2)?
• Outcome: Approved
• Key authorities: IRC § 4942(g)(2)(A), (B)(i); IRC § 170(c)(2)(B); Treas. Reg. § 53.4942(a)-3(b)(1) & (2) (suitability test); Rev. Rul. 74-450

Full text (IRS public release)

(Scanned document; OCR-proofread. Obvious scan misreads were corrected; wording is preserved verbatim. LEGEND for redacted items: B = individuals, C = center, f dollars / g dollars / h dollars = amounts.)

Department of the Treasury
Internal Revenue Service                                   Date: 11/09/2022
IRS Tax Exempt and Government Entities
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 202305018
Release Date: 2/3/2023

LEGEND                          UIL: 4942.03-07
B = individuals
C = center
f dollars = amount 1
g dollars = amount 2
h dollars = amount 3

Dear     :

Why you are receiving this letter
We received your request for approval of a set-aside under Internal Revenue Code (IRC)
Section 4942(g)(2). Based on the information furnished, your request is approved.

You are recognized as tax-exempt under IRC Section 501(c)(3) and as a private foundation under IRC
Section 509(a).

What you need to do
Document your approved set-aside(s) in your records as pledges or obligations. You must pay the set-aside
amounts within 60 months after the date of the first set-aside, as required under IRC Section 4942(g)(2).

Take into account the amounts set aside when determining your minimum investment return under IRC Section
4942(e)(1)(A) and the income attributable to your set-asides when computing your adjusted net income under
IRC Section 4942(f).

Description of set-aside request
You have requested a set-aside of f dollars for the tax year ending       .

Your mission is to serve         and children with a preference to B (the beneficiaries). You develop
and support programs that address the most basic needs of your beneficiaries including foster care, housing,
education and educational support, access to healthcare and other basic needs. You also look for opportunities
to offer programs that create and deliver other types of high-impact direct services for your beneficiaries.

The set-aside of f dollars would be used toward the construction/renovation expenses for C. This amount is in
addition to a previously approved set-aside of g dollars for the tax year ending       . You expect
the total cost of construction/renovation for C to amount to h dollars, but you do not anticipate any future
additions to the amount set-aside.

Letter 4797 (Rev. 1-2021)
Catalog Number 58293H

The purpose of C is to provide transformational programs in arts, sports, creative media, culinary arts, and
entrepreneurship for B youth. You expect C to be a convergence of B culture, creativity, technology and play
that enables your beneficiaries to be inspired and pursue their dreams. C will have diverse spaces for
recreational sports, creative arts, maker spaces, music, dance, culinary arts, and other educational programs.

The use of a set-aside to designate funds for the construction of the project ensures that the funding will be
available as the renovation costs are incurred and allows you to conduct the renovations over time. Setting aside
the funds will allow you to ensure the funds remain available while also providing time to complete the
necessary construction/renovation work to ensure that the building is appropriately suited for conducting your
charitable activities.

Design and planning for C began in       . You expect construction to start in       and be completed by       .
The project is expected to be completed within 60 months of the original set-aside with all funds that have been
set-aside paid during that time period.

Basis for our determination
IRC Section 4942(g)(2)(A) states that an amount set aside for a specific project, which includes one or more
purposes described in IRC Section 170(c)(2)(B), may be treated as a qualifying distribution if it meets the
requirements of IRC Section 4942(g)(2)(B).

IRC Section 4942(g)(2)(B) 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.

IRC Section 4942(g)(2)(B)(i) 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.

Treasury Regulation (Treas. Reg.) Section 53.4942(a)-3(b)(1) 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 Treas. Reg. Section 53.4942(a)-3(b)(2).

Treas. Reg. Section 53.4942(a)-3(b)(2) 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 IRC Section 4942(g)(2).

Additional information
This determination is directed only to the organization that requested it. IRC Section 6110(k)(3) provides that it
may not be used or cited as a precedent.
Visit www.irs.gov/setasides for more information.

We'll make this determination letter available for public inspection after deleting personally identifiable information,
as required by IRC Section 6110. Enclosed are Letter 437, Notice of Intention to Disclose - Rulings, and a copy of
the letter that shows our proposed deletions.

* If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us.
* If you agree with our deletions, you don't need to take any further action.

Letter 4797 (Rev. 1-2021)
Catalog Number 58293H

Keep a copy of this letter for your records.

We have sent a copy of this letter to your representative as indicated in Form 2848, Power of Attorney and
Declaration of Representative.

If you have questions, you can call the contact the person shown above.

Sincerely,
Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Redacted Letter 4797
Letter 437

Letter 4797 (Rev. 1-2021)
Catalog Number 58293H