IRS approves a foundation's set-aside for a historic restoration grant

Plain-English summary

A private foundation planned a matching grant to a public charity for rehabilitating and restoring a historic residence, including accessibility and code-compliance improvements. The grant would cover about one-third of the project's estimated cost, with the charity expected to raise the balance through a capital campaign prompted by the matching challenge. The foundation sought to set aside the grant amount while the charity raised matching funds and satisfied other conditions, then pay the funds within the required period. The IRS agreed that the matching arrangement and need to preserve control over the long-term project made a set-aside more suitable than immediate payment. It approved the program under section 4942(g)(2), conditioned on payment within 60 months after the first set-aside.

Ruling snapshot

• Question: Could the foundation treat the amount reserved for a historic restoration matching grant as a qualifying set-aside?
• Outcome: approved (the set-aside qualified if paid within the required 60-month period)
• Key authorities: IRC §§ 170(c)(2)(B), 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

Number: 202028001
Release Date: 7/10/2020
Employer Identification Number:

Date: April 14, 2020
Contact Person - ID Number:

Contact Telephone Number:

LEGEND

UIL: 4942.03-07

B = State

C = County

D = Place

E = Date

f dollars = Amount
g dollars = Amount

Dear Applicant:

Why you are receiving this letter

This is our response to your August 23, 2019 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 f
dollars for the C Historical Society. The C Historical Society is a public charity
exempt under Section 501(c)(3) of the Code.

The C Historical Society, among other things, owns and maintains the historic D,
an [illegible] residence. D is located within a historical district, and the
contributing structures within the district, including the D, serve as an exemplary

representation of 19th century commercial and residential development. D is
significant as a contributing structure to the Historic district. The C Historical
Society has proposed a restoration project to, among other things, rehabilitate and
restore D consistent with the historic preservation standards and make
accessibility and code-compliance improvements. The total cost of the Project is

estimated to be approximately g dollars.

The grant is subject to an agreement between you and the C Historical Society.
Pursuant to the terms of the agreement, you will make a matching grant of f dollars
to the C Historical Society to fund approximately one-third of the estimated cost of
the project if certain conditions described in the agreement are satisfied. It is
anticipated that the remaining two-thirds of the costs of the project will be funded
by donations and grants made to the C Historical Society as a result of fundraising
activities undertaken by the C Historical Society in response to your matching
grant challenge.

You stated under the terms of the agreement, if the C Historical Society raises the
matching funds and satisfies certain other conditions of the agreement, you will
disburse the funds to the C Historical Society in a lump sum within 21 business
days after satisfaction of these conditions. Upon receipt of the funds from you, the
C Historical Society will deposit the funds in a separate interest-bearing account.
Subject to the satisfaction of all of the conditions of the agreement, the C Historical
Society 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 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 the C Historical Society from the community-at-
large. You believe that, due to the extent and cost of the rehabilitation and
restoration needed for the D, 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 the C Historical Society as
allowing sufficient time for them to complete the anticipated capital campaign for
the Project.

Under the terms of the Agreement, if the C Historical Society raises the matching
funds and satisfies certain other conditions of the Agreement, you will disburse the
funds to the C Historical Society in a lump sum within 21 business days after
satisfaction of these conditions. Upon receipt of the funds from you, the C

Historical Society 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, the C Historical Society 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 the C Historical Society 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 the C Historical Society no later than E, 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. 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