Foundation may set aside funds for rehabilitation facility

Plain-English summary

A private foundation planned a multi-year project to buy land and build a rehabilitation and training facility for disabled athletes, wounded veterans, and other people with physical disabilities. It proposed an initial set-aside followed by additions over four years because selecting property, designing and constructing the facility, developing programs, and hiring staff would take three to five years. The IRS concluded that the project was better accomplished through a set-aside than an immediate payment. It approved the set-aside under Section 4942(g)(2), provided the amount is paid within 60 months after the first set-aside.

Ruling snapshot

• Question: May the foundation treat funds reserved for a multi-year rehabilitation facility project as a qualifying distribution?
• Outcome: Approved: the set-aside must be paid 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

Number: 202116019
Release Date: 4/23/2021

Date: 01/26/2021
Employer Identification Number:

Contact person - ID number:

Contact telephone number:

LEGEND

UIL: 4942.03-07
B = City, State
C = Region

w dollars = Amount
x dollars = Amount
y dollars = Amount
z dollars = Amount

Dear

Why you are receiving this letter

This is in response to your June 5, 2020 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 upon 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

One of your charitable focus areas is supporting individuals with physical disabilities. In the
course of this work, you have determined that there is an acute need for rehabilitation and training
facilities that are accessible for physically challenged athletes and military veterans in B and the C
region. You are planning to build and potentially operate such a facility for the benefit of disabled
veterans and other persons with physical disabilities.

For this purpose, you are requesting approval for the set-aside of funds in the amount of w dollars
in the first year, with subsequent planned additions to the set aside amount in the amount of x
dollars each year for the following four years. The funds will be used to purchase land and design,
develop, and construct a world class training and rehabilitation facility (the “facility”). The
purpose of the facility is to provide physically challenged athletes, wounded veterans and other
individuals with physical disabilities or challenges with holistic evaluation, recovery,
rehabilitation services and related appropriate programming. The facility will include a strength
and conditioning center, aquatics facility, commercial kitchen, classrooms and multimedia space,
an indoor multipurpose gymnasium, locker rooms, equipment storage space, administrative

Letter 4797 (11-2011)
Catalog Number 58293H

offices, a [redacted] center and other specialized facilities and equipment
to be used for rehabilitation and training. It may also include dorm space for disabled persons who
have to travel from distant places to access the therapy services.

Completion of the facility is better accomplished through a set-aside than through an immediate
payment of the funds because you must identify and purchase an appropriate property on which to
locate the facility. The set-aside will also allow the additional time necessary for design and
construction, development of the therapy programs, and hiring of appropriate management and
staff personnel. Current spending of the funds is not possible at this time because no charitable or
other organization currently exists that is capable of developing and operating the facility and
rehabilitation programs that are envisioned.

You have already identified potential sites for the facility in the B region, but you may not be able
to negotiate the property purchase prior to year-end. In order for the project to move forward, you
must reserve an appropriate amount of funds for the purchase of the property and the design and
construction phases for the facility. It is anticipated that it will take approximately three to five
years to complete the facility.

The total estimated cost of purchasing the property and completing the facility is between y dollars
and z dollars. Currently, it is anticipated that any future funds needed for completion of the facility
will be provided by you. However, due to the innovative approach of this project and the
populations it will serve, you anticipate that other donors may be interested in providing financial
and operational support. You contemplate that you may, in the future, help to form an independent
public charity to operate the facility and solicit public support for related services and programs.

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 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 be better 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 sustainability test described in Section 53.4942(a)-3(b)(2).

Section 53.4942(a)-3(b)(2) of the Foundations and Similar Excise Taxes provides that specific
projects better accomplished using a set-aside include, but are not limited to, projects where

Letter 4797 (11-2011)
Catalog Number 58293H

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 into a four-year construction contract. The construction
contract payments were to be 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 when 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(j)(3) provides that it may not be used or cited as 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 questions, please contact the person listed in the heading of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure

Letter 4797 (11-2011)
Catalog Number 58293H