Private foundation may set aside funds to build a boarding school

Plain-English summary

A private foundation proposed to build a tuition-free boarding school for high-achieving public school students who met its scholarship eligibility standard. The project required acquiring a site, completing architectural plans, and constructing the school over several years. The IRS approved a multiyear set-aside under section 4942(g)(2) because the long-term construction project could be better accomplished by accumulating funds than by immediate payment. The foundation had to pay the set-aside amounts within 60 months after the first set-aside and record them as pledges or obligations.

Ruling snapshot

• Question: Could the private foundation treat funds reserved to build the boarding school as qualifying distributions?
• Outcome: Approved, subject to payment within the required 60-month period.
• Key authorities: IRC §§ 4942(g)(2), 4942(e)(1)(A), and 4942(f); Treas. Reg. § 53.4942(a)-3(b); Rev. Rul. 74-450

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR against all three page images. Obvious OCR misreads were corrected, redacted identifiers, years, and amounts are marked [redacted], and wording is otherwise verbatim.

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

Release Number: 201848018                        Employer Identification Number:
Release Date: 11/30/2018                         [redacted]
Date: September 4, 2018
                                                 Contact Person - ID Number:
                                                 [redacted]
                                                 Contact Telephone Number:
                                                 [redacted]

LEGEND                                           UIL:
                                                 4942.03-07
B = Specified scholarship
C = Scholarships
x dollars = Initial set-aside
y dollars = Total project cost

Dear [redacted]:

Why you are receiving this letter

This is our response to your January 29, 2018, 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 propose set-asides for the purpose of constructing an academy to help
students similar to B recipients. The academy will be a private boarding school for
high achieving high school students from public high schools whose students are
eligible for B. Admitted students will attend the school at no charge. You will pay
all tuition, fees, room and board, books and other costs.

The amount of the set-aside for calendar year 20[redacted] is x dollars. Additional set-
asides for the years of 20[redacted], 20[redacted], 20[redacted] and 20[redacted] will equal the excess of the
undistributed income in each year that is not used for the purpose of awarding C.
The total estimated cost of the project is y dollars.

The project can better be accomplished by set-aside rather than immediate
payment of funds because it is a long-term project, the building site is not currently
owned, architectural plans have not been finalized; preparing architectural plans
and building the project will take more than a year; such a project reasonably
requires a period of time that spans several years and is customary in the
construction business that payments are made as work is completed. A statement
has been submitted that the amounts to be set-aside will actually be paid within a
specified time period not to exceed 60 months from the date of the first 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