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

Plain-English summary

A private foundation asked the IRS to approve a "set-aside," which lets it earmark money now for a specific project and still count it toward the minimum it must distribute each year, as long as it pays within 60 months. Here the foundation pledged a matching grant to a county governmental body to restore decorative arts and murals in a historic building the county owns and maintains. The matching-grant structure is meant to draw donations from the wider community, and the foundation wants to keep quality control over the restoration. The IRS found the request met the "suitability test" under § 4942(g)(2) and approved it. This matters because the approval lets the foundation count the pledged amount toward its required distributions even though the cash goes out later.

Ruling snapshot

• Question: Should the foundation's set-aside for a historic decorative-arts restoration matching grant be approved as a qualifying distribution under § 4942(g)(2)?
• Outcome: Approved
• Key authorities: IRC § 4942(g)(2)(A) and (B); Treas. Reg. § 53.4942(a)-3(b)(1) and (2) (suitability test); Rev. Rul. 74-450, 1974-2 C.B. 388

Full text (IRS public release)

Department of the Treasury                    Date:
Internal Revenue Service                      05/31/2022
Tax Exempt and Government Entities

IRS   P.O. Box 2508
      Cincinnati, OH 45201

                                              Employer ID number:

                                              Person to contact:
                                              Name:
Number: 202234011                             ID number:
Release Date: 8/26/2022                       Telephone:
                                              Fax:

LEGEND                                        UIL: 4942.03-07
B = State
C = County
D = Building
E = Building
F = Date
G = Date

x dollars = Amount
y dollars = Amount

Dear

Why you are receiving this letter
We received your request for approval of a set-aside under Internal Revenue Code (IRC)
Section 4942(g)(2). Based on the information furnished, your request is approved.

You are recognized as tax-exempt under IRC Section 501(c)(3) and as a private foundation under IRC
Section 509(a).

What you need to do
Document your approved set-aside(s) in your records as pledges or obligations. You must pay the set-aside
amounts within 60 months after the date of the first set-aside, as required under IRC Section 4942(g)(2).

Take into account the amounts set aside when determining your minimum investment return under IRC Section
4942(e)(1)(A) and the income attributable to your set-asides when computing your adjusted net income under
IRC Section 4942(f).

Description of set-aside request
You were formed under the state laws of B. You wish to set aside a grant totaling x dollars to C, a body
corporate and politic in the state of B. B is a governmental unit as described in IRC Section 170(c)(1). B owns
and maintains the historic D.

C has proposed a restoration project to, among other things, repair, recreate, and preserve the decorative arts
and murals in E in a manner consistent with the historic preservation standards (the "Project"). The total cost of
the Project is estimated to be y dollars. The purpose of the Project is to conserve, preserve, and reproduce
damaged historic finishes and decorative elements of E to its original condition.

Your grant is the subject of a grant agreement between you and C, dated effective as of F (the "Agreement").
Pursuant to the terms of the Agreement, you will make a matching grant of x dollars to C to fund approximately
of the estimated cost of the Project if certain conditions described in the Agreement are satisfied. It is
anticipated that the remaining of the costs of the Project will be funded by donations and grants made
to C as a result of fundraising activities undertaken by C in response to your matching grant challenge.

Under the terms of the Agreement, if C raises the matching funds and satisfies the certain other conditions of
the Agreement, you will disperse the funds to C in a lump sum within __ business days after the satisfaction of
these conditions. Upon receipt of the funds from you, C will deposit the funds in a separate interest-bearing
account. Subject to the satisfaction of all the conditions of the Agreement, C may make disbursements from the
account to pay reimbursable costs of the Project provided that, unless otherwise agreed upon by you,
disbursements from the account are limited to of the total reimbursable costs incurred in connection
with the Project to the date of disbursement.

You state that 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 the use of a set-aside. With
regard to the matching grant program, you believe the program is necessary to stimulate grants to C from the
community at large. You believe that, due to the extent and cost of the rehabilitation needed for E, grants from
the community at large must form an essential and significant part of the Project funding. You hope to
encourage other donors to support the Project through the matching grant program. The approximate -year
period provided in the Agreement to raise the necessary matching funds has been mutually agreed between you
and C as allowing sufficient time for C to complete its anticipated capital campaign for the Project.

With regard to the maintenance of quality control, you believe it is crucial that you retain a degree of control
over the renovation process because of your concern with the preservation of the historical features of E. By
making disbursements of the funds dependent upon approval of outside consultants and contractors and of
drawings, plans, and specifications of the Project, you believe you can best meet the goal of restoring E and
assure the final restoration project is consistent in scope and concept with the Project originally submitted to
you by C.

Per the Agreement, payment of the grant must be made no later than G which is less than 60 months from the
date of the set-aside.

Basis for our determination

IRC Section 4942(g)(2)(A) states that an amount set aside for a specific project, which includes one or more
purposes described in IRC Section 170(c)(2)(B), may be treated as a qualifying distribution if it meets the
requirements of IRC Section 4942(g)(2)(B).

IRC Section 4942(g)(2)(B) 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.

IRC Section 4942(g)(2)(B)(i) 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.

Treasury Regulation (Treas. Reg.) Section 53.4942(a)-3(b)(1) 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 Treas. Reg. Section 53.4942(a)-3(b)(2).

Treas. Reg. Section 53.4942(a)-3(b)(2) 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 IRC Section 4942(g)(2).

Additional information
This determination is directed only to the organization that requested it. IRC Section 6110(k)(3) provides that it
may not be used or cited as a precedent.

Visit www.irs.gov/setasides for more information.

We'll make this determination letter available for public inspection after deleting personally identifiable information,
as required by IRC Section 6110. Enclosed are Letter 437, Notice of Intention to Disclose - Rulings, and a copy of
the letter that shows our proposed deletions.

- If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us.
- If you agree with our deletions, you don't need to take any further action.
Keep a copy of this letter for your records.

If you have questions, you can call the contact person shown above.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Redacted Letter 4797
Letter 437