Historic preservation matching-grant set-aside receives approval

Plain-English summary

A private foundation proposed setting aside a matching grant equal to one-third of the estimated cost of restoring the exterior of a historically and culturally significant building listed on the National Register of Historic Places. The recipient public charity would raise the remaining two-thirds through a capital campaign over roughly three years. If the matching and other agreement conditions were met, the foundation would pay the grant in a lump sum, and the charity would keep it in a separate account used only for reimbursable restoration costs. The IRS agreed that the long-term fundraising and project-control needs made a set-aside more suitable than immediate payment. It approved the set-aside under Section 4942(g)(2), subject to payment within the required 60-month period.

Ruling snapshot

• Question: Could the foundation treat the historic-preservation matching grant as an approved set-aside qualifying distribution?
• Outcome: Approved, with payment required within 60 months after the first set-aside.
• 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

Release Number: 201824015
Release Date: 6/15/2018
Date: March 20, 2018

Employer Identification Number:

Contact Person - ID Number:

Contact Telephone Number:

LEGEND UIL: 4942.03.07

B = State
C = Organization

D = State

E = Building

F = Date

t dollars = Amount
u dollars = Amount

Dear [redacted]:

Why you are receiving this letter

This is our response to your September 18, 2017 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 totaling t dollars for
C. C is a public charity exempt under Section 501(c)(3) of the Code. C is organized under
the laws of the state of D. As a public charity under Section 509(a)(2), C, among other
things, promotes history in its local area, including the E. The E is a historically and
culturally significant structure, a national treasure and an important piece of central D’s
heritage. C has proposed a project to preserve and restore the exterior of the E (the
“Project”). The E is included on the National Register of Historic Places. The total cost of
the Project is estimated to be approximately u dollars. The purpose of the grant is to
assist in funding the Project.

You have entered into an Agreement with C. Pursuant to the terms of the Agreement,

you will make a matching grant of t dollars to fund one-third of the estimated cost of the
Project. It is anticipated that the remaining two-thirds of the cost of the Project will be
funded by donations and grants made to C as a result of fundraising activities undertaken
by C in response to C’s matching grant challenge.

The Project can be better accomplished by use of a set-aside. The purpose of the grant
requires the use of a matching-grant program and the preservation of control over the
long-term project, both of which can be better accomplished by use of a set-aside.
Regarding the matching-grant program, you believe that the program is necessary to
stimulate grants to C from the community-at-large. You believe that, due to the extent
and cost of the rehabilitation and restoration needed for the E, grants from the
community-at-large must form an essential and significant part of the Project funding.
Through your matching-grant program, you hope to encourage other donors to support
the Project. The approximate three-year period provided in the Agreement to raise the
necessary matching funds has been mutually agreed by you and C as allowing sufficient
time for C to complete its anticipated capital campaign for the Project.

Under the terms of the Agreement, if C raises the matching funds and satisfies certain
other conditions of the Agreement, you will disburse the funds to C in a lump sum within
21 business days after satisfaction of these conditions. Upon receipt of the funds from
you, C will deposit the funds in a separate interest-bearing account (the “Project
Account”). Subject to the satisfaction of all of the conditions set forth in the Agreement, C
may make disbursements from the Project Account to pay reimbursable costs of the
Project, provided that, unless otherwise agreed by you, disbursements from the Project
Account are limited to one-third of the total reimbursable costs incurred in connection with
the Project to the date of disbursement. The Agreement further specifies that C must use
your gift solely for “reimbursable costs” incurred in connection with the Project and for no
other purpose.

The payment must be made to C no later than F, which is less than 60 months from the
date of the set-aside.

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 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