Historic theater matching-grant set-aside receives approval

Plain-English summary

A private foundation proposed a matching grant equal to about one-third of the estimated cost of restoring a historic theater listed on the National Register of Historic Places. The recipient public charity would raise the remaining two-thirds and satisfy conditions covering fundraising, project plans, construction supervision, funding, contract approval, and continued charitable status. Once those conditions were met, the foundation would pay the grant into a separate account used only for approved project costs. The IRS found that the matching-grant structure satisfied the suitability test for a set-aside and approved the program under Section 4942(g)(2). The grant had to be disbursed within 60 months of the set-aside.

Ruling snapshot

• Question: Could the foundation treat its matching grant for restoration of a historic theater as an approved set-aside?
• Outcome: Approved, with disbursement required within 60 months of the set-aside.
• Key authorities: IRC §§ 170(c)(2)(B) and 4942(g)(2); Treas. Reg. § 53.4942(a)-3(b); Rev. Rul. 77-7

Full text (IRS public release)

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

Number: 201823010
Release Date: 6/8/2018
Date: March 14, 2018

Employer Identification Number:

Contact Person - ID Number:

Contact Telephone Number:

LEGEND
B = State
C = Town
D = State
E = Name of Organization
F = Name of theatre
n dollars = Amount of matching grant
p dollars = total cost of project
q dollars = Total matching contributions
s = Date 1
t = Date 2
u = Date 3
v = Date 4
w = Date 5
x = Date of set-aside

UIL:
4942.03-07

Dear [redacted]:

Why you are receiving this letter

This is our response to your December 9, 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 were incorporated in the state of B. You wish to set aside a grant of n dollars
to E to assist in funding the restoration of F. E, a Section 501(c)(3) public charity
organized under the law of the state of D, owns and operates F. F is a unique
historic theatre listed on the National Register of Historic Places. The estimated
total cost of the restoration project is p dollars.

By the terms of your agreement with E, you will make a matching grant of n dollars
to E to fund approximately one-third of the estimated cost of the project. It is
estimated that the remaining two-thirds of the estimated costs of the project will be
funded by donations and grants raised by E in response to your matching grant
challenge.

If E raises the matching funds and satisfies certain conditions of the agreement,
you will disburse the funds in a lump sum within 21 business days. E will deposit
the funds in a separate interest-bearing account (the “Project Account”). E may
make disbursements from the Project Account to pay costs of the project, not to
exceed one-third of the total “reimbursement costs” incurred exclusively for the
project and no other purpose. Reimbursement costs are costs actually incurred by
E for labor, materials, fees and permits for the project, including the labor,
materials and other items described in the proposal.

Specific conditions to the grant are as follows:

(a) On or before date s (the “Challenge Deadline”), E shall (i) have received
eligible matching contributions for the project in an amount not less than q dollars,
and (ii) shall have provided you with evidence satisfactory to you in your sole
discretion that such eligible matching contributions have been received;

(b) On or before date t, you shall have received assurances satisfactory to you
that E has engaged an architectural or contracting firm approved by you as the
supervising architect or construction manager for the Project;

(c) On or before date u, E shall have submitted to you and you shall have in
writing, the drawings, plans and specifications for the Project;

(d) On or before date v, you shall be satisfied, in your sole discretion, that E
has sufficient funding to complete the Project as embodied in the Plans;

(e) Prior to disbursement of any portion of the grant from the project account
for the purchase of any materials or the performance of any work on the Project, E
shall have received written approval from you on the contractor, vendor or other
supplier and all final awarded contracts exceeding 5% of the total Project costs for
labor and/or materials; and

(f) E shall be an organization currently described in Section 501(c)(3) and
509(a)(1) or (2) of the Internal Revenue Code when the Grant is initially paid to E
and at the time of disbursement of any portion of the grant from the project
account.

You have established that your project satisfies the suitability test described in
Section 53.4942(a)-3(b)(2) of the Foundations and Similar Excise Taxes

Regulations. Specifically, your project can be better accomplished by use of a set-aside because the grant is part of a grant matching program. Furthermore, you
have represented that the grant will be disbursed not later than date w, 21 days
after the latest possible date for satisfaction of the specified conditions, and less
than 60 months from the date of the set-aside, x.

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, or
where grants are made as part of a matching grant program.

Revenue Ruling 77-7, 1977-1 C.B. 354, describes a private foundation which set
aside income for eventual distribution to an unrelated public charity for
construction of a specific building project. The Internal Revenue Service held that
the building project was a “specific project” within the meaning of the applicable
Code and Regulations Sections.

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