Set-aside approved for construction of a specific exhibit

Plain-English summary

A private foundation requested approval to set aside a redacted amount for a specific exhibit planned by another organization. The exhibit was part of a larger capital campaign, and the long planning and design process meant most construction spending would occur later. The foundation said the set-aside would delay payment until construction began, demonstrate significant support to other donors, and preserve the funds with potential investment growth until needed. The IRS approved the set-aside under section 4942(g)(2) because the project could be better accomplished through delayed funding than immediate payment. The full amount must be paid within 60 months after the first set-aside, documented as a pledge or obligation, and included in the foundation's minimum investment return and adjusted net income calculations as required.

Ruling snapshot

• Question: May the private foundation treat funds reserved for a future exhibit as an approved set-aside qualifying distribution?
• Outcome: approved
• Key authorities: IRC §§ 170(c)(2)(B), 4942(e), 4942(f), 4942(g)(2); Treas. Reg. § 53.4942(a)-3(b)

Full text (IRS public release)

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

Employer Identification Number:
Release Number: 201738014
Release Date: 9/22/2017
Date: June 28, 2017

Contact Person - ID Number:

Contact Telephone Number:

LEGEND:

W = Organization
x dollars = Amount
y dollars = Amount

UIL: 4942.03-07

Dear :

Why you are receiving this letter

This is our response to your December 5, 2016, 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 requested approval of a set-aside of x dollars for the taxable year ending
December 31, , for the purpose of funding an exhibit W plans to construct.
W is undertaking a capital campaign to add several exhibits and improve its
infrastructure. You paid y dollars in cash grants in for W’s capital campaign
to be used as W saw fit.

You want your future grants to be devoted to a specific exhibit. Your project is
better accomplished through a set-aside rather than through an immediate
payment of funds because, due to the long planning and design process, the bulk
of those funds are not expected to be expended on construction until through

The set-aside would serve three purposes:

• To defer the payment of those funds until design and construction is under
way.

• To demonstrate to potential donors that the specific exhibit has already
attracted significant support.

• To allow those funds to be preserved and potentially grow between now
and the time they’re needed.

You plan to set-aside x dollars in and anticipate paying the entire x dollars to
W in the first quarter of , but no later than the end of that year, assuming
construction is under way. You attested that the entire x dollars will be paid within
the 60-month period after the date of the first set-aside regardless of whether
construction is under way.

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 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 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