IRS approves a private foundation's contingent set-aside for grant funds frozen by a court order

Plain-English summary

A private foundation must pay out a minimum amount each year for charitable purposes or face an excise tax on its undistributed income under Section 4942. Here a court order arising from litigation directed a bank trustee to hold, rather than release, distributions from a trust that the foundation was entitled to, so the foundation could not actually pay out those funds. The foundation asked the IRS to approve a "contingent set-aside" under Treasury Regulation 53.4942(a)-3(b)(9), which lets a foundation blocked by litigation treat the frozen amount as a qualifying distribution now, provided it actually distributes the money by the last day of the tax year after the litigation ends. The IRS approved the set-aside for the stated amount and tax year. The approval carries the standard conditions: the amount must be recorded in the foundation's books as a pledge, it counts toward the foundation's minimum investment return, any income on it counts in adjusted net income, and any part not distributed on time is pulled back into income.

Ruling snapshot

• Question: May a private foundation that a court order bars from distributing trust funds obtain a contingent set-aside under Treas. Reg. § 53.4942(a)-3(b)(9) so the frozen amount counts as a qualifying distribution?
• Outcome: Approved (contingent set-aside granted for the stated amount and tax year, subject to the regulation's distribution deadline and bookkeeping conditions)
• Key authorities: IRC § 4942(a), (c), (d), (g); Treas. Reg. §§ 53.4942(a)-3(b)(9), 53.4942(a)-2, 53.4942(a)-3(a)(2); § 170(c)(2)(B)

Full text (IRS public release)

Transcriber's note: this document is a degraded scan. Per the runbook's proofreading duty, obvious OCR misreads have been corrected, wording is kept verbatim, and the IRS's redaction blanks are preserved as gaps. Genuinely unreadable spots are marked [illegible]. The redacted tax-year digits appear in the scan as a bare "20" and are left as the IRS released them.

Internal Revenue Service Department of the Treasury
P.O. Box 2508

Cincinnati, OH 45201

Date: January 4, 2022

Employer Identification Number:

Release Number: 202213014 Contact person - ID number:
Release Date: 4/1/2022

Contact telephone number:

LEGEND: UIL:

B= city/state 4942.03-07
C= business

D= date 1

E= date 2

F= bank

G= amount

J= trust

L= organization

Dear

Why you are receiving this letter

This is in response to your request of December 23, 2020 requested approval of a contingent set-
aside under section 53.4942(a)-3(b)(9) of the Foundation Excise Taxes Regulations for the taxable
year ended December 31, 20

You have been recognized as exempt under section 501(c)(3) of the Internal Revenue Code of

1986. You have also been recognized as a private foundation described in Section 509(a) of the
      Code.

Facts

Based upon the information furnished, your Contingent set-aside is approved under Section
53.4942(a)-3(b)(9) of the Foundation Excise Taxes Regulations. As required under Section
53.4942(a)-2, the Contingent set-aside amount must be distributed by the last day of the
taxable year following the taxable year in which the litigation is terminated. Amounts not
distributed by the close of the appropriate taxable year shall be treated as described in
Section 53.4942(a)-2 (d)(2)(iii)(c) for the succeeding taxable year

Description of Set-Aside Request

On E, C filed a motion for Temporary Restraining Order and Injunction against F in the
Court for B. On D, the court ordered that F shall hold any distributions from J to

which C may now be, or in the future will be, entitled to pursuant to the terms of J until the

Court enters an order directing F to either disburse such funds to C or to disburse such funds

as the Court may otherwise direct. The court also ordered that F shall invest the funds held
pursuant to the Court’s order in the same manner as the remainder of the corpus of J is
being invested and that F shall keep a separate accounting for any distributions that may be
due to C, pursuant to the terms of J. The court additionally ordered that B may continue to
make disbursements to its other beneficiary, L, in the ordinary course; however, such
distributions shall not include any amounts to which C is or will be entitled to should the
Court ultimately rule in its favor. The Court further ordered that all other matters are
reserved.

You stated that the set-aside amount for tax year 20 is g dollars.

Law

Section 4942(a) of the Code generally imposes an excise tax on the undistributed income of a
private foundation for any taxable year which has not been distributed before the first day of the
second (or any succeeding) taxable year following such taxable year. For purposes of section
4942, the term “distributed” means distributed as qualifying distributions under section 4942(g).

Section 4942(c) defines “undistributed income” as the amount by which the distributable amount
for such taxable year, exceeds the qualifying distributions made before such time out of such
distributable amount.

As defined by Section 4942(d) the computation of the “distributable amount” for a taxable year is
the sum of the minimum investment return plus the amounts described in subsection (f)(2)(C),
reduced by the sum of the taxes imposed on such private foundation for the taxable year under
subtitle A and section 4940.

Section 4942(g)(1) of the Code defines “qualifying distribution” as any amount (including that
portion of reasonable and necessary administrative expenses) paid to accomplish one or more
purposes described in section 170(c)(2)(B), other than any contribution to (i) an organization
controlled (directly or indirectly) by the foundation or one or more disqualified persons (as defined
in section 4946) with respect to the foundation, except as provided in paragraph (3), or (ii) a
private foundation which is not an operating foundation (as defined in subsection (j)(3)), except as
provided in paragraph (3), or any amount paid to acquire an asset used (or held for use) directly in
carrying out one or more purposes described in section 170(c)(2)(B).

Section 53.4942(a)-2(d)(2)(iii)(c) of the Foundation and Similar Excise Taxes Regulations
includes in gross income for the taxable year any amount set aside under Section 53.4942(a)-3(b)
to the extent it is determined that such amount is not necessary for the purposes for which it was
set aside.

Section 53.4942(a)-3(a)(2)(iii) of the Regulations defines as a qualifying distribution, in relevant
part, to mean, any amount set aside within the meaning of paragraph (b) of section 3.

Section 53.4942(a)-3(b)(9) of the Regulations provides that if a private foundation is involved in
litigation and may not distribute assets or income because of a court order, the private foundation
may seek and obtain a set-aside for the purpose described in section 53.4942(a)-3(a)(2). The

amount to be set-aside shall be equal to that portion of the private foundation's distributable
amount which is attributable to the assets or income that are held pursuant to court order and
which, but for the court order precluding the distribution of such assets or income, would have
been distributed. In the event that the litigation encompasses more than one taxable year, the
private foundation may seek additional contingent set-asides. Such amounts must actually be
distributed by the last day of the taxable year following the taxable year in which the litigation is
terminated. Amounts not distributed by the close of the appropriate taxable year shall be treated as
described in Sec. 53.4942(a)-2(d)(2)(iii)(c) for the succeeding taxable year.

Application of Law

While litigation is pending, a court order prevented you from making the distributions which are
the subject of the set-aside. These are the circumstances described in Section 53.4942(a)-3(b)(9)
of the Regulations.

Accordingly, we rule that g dollars, the amount which would have been distributed before
December 31,20, but for the Court’s order precluding such distribution, qualifies as a

contingent set-aside described in Section 53.4942(a)-3(b)(9) for taxable year ending December 31,
20

This ruling is based on the facts as they were presented and on the understanding there will be no
material changes in the facts upon which it is based. Any changes that may have a bearing on your
tax status should be reported to the Internal Revenue Service. This ruling does not address the
applicability of any section of Code or regulations to the facts submitted other than with respect to
the sections described.

We direct your attention to Section 53.4942(a)-3(b)(8) of the Regulations, entitled “Evidence of
Set-Aside.” This section provides that any set-aside approved by the Internal Revenue Service
shall be evidenced by the entry of a dollar amount in the books and records of a private foundation
as a pledge or obligation to be paid at a future date or dates. Further, the amount of the set-aside
must be taken into account in determining the foundation's minimum investment return (see
Section 53.4942(a)- 2(c)(1) of the Regulations), and any income attributable to a set-aside must be
taken into account in computing adjusted net income (see Section 53.4942(a)-2(d) of the
Regulations).

Additional Information

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

This ruling will be made available for public inspection under Section 6110 of the Code after
certain deletions of identifying information are made. For details see the enclosed Notice 437,
Notice of Intention to Disclose. A copy of this ruling with deletions that we intend to make
available for public inspection is attached to Notice 437. If you disagree with our proposed
deletions, you should follow the instructions in Notice 437.

Please keep a copy of this ruling letter in your permanent records.

If you have any questions about this ruling, please contact the person whose name and telephone
number are shown above in the heading of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure