Educational-facility construction set-aside approved

Plain-English summary

A private foundation requested approval to set aside an amount for construction of an educational facility with classrooms and research space. COVID-19 disruptions made project scheduling uncertain, contractors were slow to respond, and adequate workers were difficult to find. The foundation said an immediate expenditure could rush the work, while a set-aside would allow it to complete the project properly. It planned to use any remaining amount for other educational-building construction, renovation, or repairs within the required period. The IRS approved the set-aside under section 4942(g)(2), subject to payment within 60 months and the applicable recordkeeping and computation rules.

Ruling snapshot

• Question: Could a private foundation treat funds reserved for delayed educational-facility construction as a qualifying set-aside?
• Outcome: Approved, with the amount to be paid within 60 months
• Key authorities: IRC § 4942(g)(2); Treas. Reg. § 53.4942(a)-3(b); Rev. Rul. 74-450

Full text (IRS public release)

Department of the Treasury Date:

Internal Revenue Service 07/25/2022
: Tax Exempt and Government Entities Employer ID number:
IRS P.O. Box 2508
. Cincinnati, OH 45201 Person to contact:
Name:
Number: 202242024 n one
Release Date: 10/21/2022 fx
LEGEND UIL: 4942.03-07
B = location
C = state
D = township

f dollars = amount

Dear

Why you are receiving this letter
We received your August 10, 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 have requested a set-aside of f dollars for the tax year ending December 31,

The purpose of the set-aside is to fund construction of an educational facility, including classroom and research
facilities, you will use for programs located at B in C.

You are requesting the set-aside because COVID-19 continues to be a concern as you are unable to schedule or
determine when construction projects for the education facility will be completed. Contractors have been slow
to respond to you and are having difficulty finding adequate workers. The set-aside will allow you to properly
manage the construction projects and bring them to a quality conclusion. Without the set-aside, the projects
would be rushed and, given the current COVID-19 situation, it is unlikely you will be able to finish the projects
before the end of the year.

Letter 4797 (Rev. 1-2021)
Catalog Number 58293H

You will use the same design for the education facility of the B project as you used for your D project. You also
plan to use the same construction company that you used for the D project. You will review potential costs and
provided cost estimates. You acknowledge amounts provided are estimates and conditions are likely to be
discovered during construction that will require additional work.

You will distribute the full set-aside amount within months after the date of the first set-aside. If the B
project or any aspect of the project is blocked for any reason or the costs end up lower than the estimates, you
will use the full or remaining set-aside amount toward other education building renovations, repairs, or new
structures that may be built within the next 60 months.

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.

Letter 4797 (Rev. 1-2021)
Catalog Number 58293H

Keep a copy of this letter for your records.
If you have questions, you can call the contact the person shown above.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements -

Enclosures:
Redacted Letter 4797
Letter 437

Letter 4797 (Rev. 1-2021)
Catalog Number 58293H