IRS approves a private foundation's 5-year set-aside under section 4942(g)(2) to fund construction and renovation for programs serving orphaned and destitute children

Plain-English summary

A private foundation whose mission is to serve orphaned and destitute children asked the IRS to approve a "set-aside" under section 4942(g)(2). A set-aside lets a private foundation earmark money now, and count it toward the annual payout it must make to avoid excise tax, even though the cash will not actually be spent until later. Here the foundation wanted to reserve funds to renovate two already-purchased properties that will house programs such as foster care, housing, education, healthcare, and other services for its beneficiaries. It cited COVID-19 delays and the multi-year nature of the construction. The IRS approved the set-aside. Because the renovation is a specific project that is better accomplished with reserved funds than an immediate payment, it meets the "suitability" test in section 4942(g)(2)(B)(i) and the regulations. The set-aside amount must be paid out within the 60-month (5-year) period after the first set-aside.

Ruling snapshot

• Question: May the private foundation treat its set-aside of funds for the renovation of two properties as a qualifying distribution under section 4942(g)(2)?
• Outcome: Approved
• Key authorities: IRC § 4942(g)(2); Treas. Reg. § 53.4942(a)-3(b)(1), (b)(2); Rev. Rul. 74-450

Full text (IRS public release)

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

Date: August 3, 2021

Employer Identification Number:

Number: 202143010

Release Date: 10/29/2021

Contact person - ID number:

Contact telephone number:

LEGEND:
B = population
C = program center 1
D = program center 2
g dollars = amount 1
h dollars = amount 2
j dollars = amount 3
k dollars = amount 4

UIL: 4942.03-07

Dear

Why you are receiving this letter

This is in response to your December 18, 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

You have requested a set-aside of g dollars for the tax year ending December 31,

Your mission is to serve orphan and destitute children, with a preference given to B (the
beneficiaries). You develop and support programs that address the basic needs of your
beneficiaries, including foster care, housing, education and educational support, access to
healthcare and other basic needs. In addition, you look for opportunities to offer programs that
create and deliver other kinds of high impact services for your beneficiaries.

The current construction projects which would fall under the set-aside of g dollars are for your
properties consisting of C and D.

Letter 4797 (11-2011)
Catalog Number 58293H

For C, you have budgeted h dollars of the total set-aside amount of g dollars to be used for the
renovation of the property. C will integrate housing, employment support programs, healthcare,
social services, hygiene, meals, and access to public benefit programs, in order to support your
beneficiaries on their pathways to thriving.

For D, you have budgeted j dollars of the total set-aside amount of g dollars to be used for the
renovation of the property. D will enable your beneficiaries to discover pathways to purpose,

You plan to set aside an additional k dollars for D in the tax year

The use of a set-aside to designate funds for the construction of the projects ensures that the
funding will be available as the renovation costs are incurred, and allows you to conduct the
renovations over time. The properties have already been purchased but the buildings need to be
renovated for them to be suitable for your purposes. Setting aside the funds now allows you to
ensure that funds remain available while also providing time to complete the necessary
construction/renovation work to ensure that the buildings are appropriately suited for conducting
your charitable activities. You are also requesting the set-aside because of unplanned delays due to
the impact of COVID-19 and restricted state-wide business operations.

You expect to begin construction/renovation on C in late and be completed by . Design
and planning for D is also expected to begin in , with construction to start in , and be
completed by . In any event, both projects are expected to be completed with the 60 months
after 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 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
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