Private foundation's set-aside to build a cultural and arts facility is approved as a qualifying distribution

Plain-English summary

A private foundation must pay out a minimum amount for charitable purposes each year, but it can instead "set aside" funds for a specific long-term project and still count them as a qualifying distribution, provided the IRS approves and the money is paid out within five years. This foundation asked to set aside funds to help develop a mixed-use cultural and arts facility, including a 500-plus seat theater and over 16,000 square feet of gallery, classroom, workspace, and rehearsal space, as part of a redevelopment plan in a given area. The funds would mostly cover construction costs, with the project expected to finish within four years. The IRS approved the set-aside under section 4942(g)(2), finding the arts facility is a "specific project" better accomplished with a set-aside than immediate payment (the suitability test), because it requires long-term expenditures exceeding one year's income. The approved amount must be paid within the 60-month window. The ruling lets the foundation reserve money for the facility without failing its annual payout requirement.

Ruling snapshot

• Question: May the private foundation treat funds set aside to develop a cultural and arts facility as a qualifying distribution under section 4942(g)(2)?
• Outcome: Approved (set-aside approved; must be paid within 60 months)
• Key authorities: IRC §§ 4942(g)(2)(A) & (B), 170(c)(2)(B); 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: 201904019 Employer Identification Number:
Release Date: 1/25/2019
Date: November 2, 2018 Contact Person - ID Number:

Contact Telephone Number:

LEGEND UIL

x dollars = amount 4942.03-07
Y = area

Dear

Why you are receiving this letter

This is our response to your February 28, 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 plan on facilitating the development of a mixed use cultural and arts facility to
house galleries, classrooms, work spaces and a theater rehearsal space. This will
include a 500+ seat theater and over 16000 square feet of arts-related space. This
facility will be part of a redevelopment plan within the Y.

The initial amount to be set aside for this project is x dollars. Funds will mostly
cover operating expenses in constructing the facility. You have no planned
additions. solely to promote and advance interests in art, music, drama and
theater. Being able to set aside these funds for this project will enable you to fulfill
these purposes and serve the residents of Y

You expect the project to be completed within the next four years; as such,
amounts set aside will be paid within a period of five years.

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

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