IRS approves a private foundation's set-aside to fund multi-year construction of a public cultural and educational center

Plain-English summary

A private foundation asked the IRS to approve a "set-aside." Private foundations normally must
pay out a minimum amount for charitable purposes each year, but section 4942(g)(2) lets a
foundation instead earmark ("set aside") money for a specific project and still count it toward
that payout requirement, as long as the money is actually spent within 60 months and the
project is one better accomplished by saving up than by paying right away. This foundation runs
educational programs for the public and is building a cultural and educational center that will
house exhibits, a cafe, a gift shop, performance and classroom spaces, an auditorium, and
indoor and outdoor gathering areas, all open to the general public once finished. It asked to set
aside construction funds (an initial amount for one tax year plus an addition for the next), with
the rest of the cost expected to come from individual donors. The IRS approved the request
because a multi-year construction project fits the "suitability test": long-term expenditures paid
on an "as work is done" basis that take more than one year's income to complete. The IRS cited
Rev. Rul. 74-450, where a foundation's set-aside for a multi-year public-park construction
contract qualified. The foundation must document the set-aside as a pledge, pay it within 60
months of the first set-aside, and factor the amounts into its minimum-investment-return and
adjusted-net-income calculations.

Ruling snapshot

• Question: May a private foundation treat funds earmarked for the multi-year construction of a public cultural and educational center as a qualifying distribution set-aside under IRC § 4942(g)(2)?
• Outcome: Approved
• Key authorities: IRC § 4942(g)(2)(A), (B)(i); IRC § 170(c)(2)(B); Treas. Reg. § 53.4942(a)-3(b)(1) & (2) (suitability test); Rev. Rul. 74-450

Full text (IRS public release)

(Scanned document; OCR-proofread. Obvious scan misreads were corrected; wording is preserved verbatim. LEGEND for redacted items: H = State, J = Name, K = City, L / M / N = Year, p dollars / q dollars / r dollars / s dollars / t dollars = Amount.)

Department of the Treasury
Internal Revenue Service                                   Date: 11/28/2022
Tax Exempt and Government Entities
IRS P.O. Box 2508
Cincinnati, OH 45201

Number: 202308013
Release Date: 2/24/2023

Employer ID number:
Person to contact:
Name:
ID number:
Telephone:
Fax:

UIL: 4942.03-07

LEGEND
H = State
J = Name
K = City
L = Year
M = Year
N = Year
p dollars = Amount
q dollars = Amount
r dollars = Amount
s dollars = Amount
t 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 are incorporated in the state of H for the purpose of establishing, operating, sponsoring, and managing
programs that provide educational services and resources to the general public.

You have requested a set-aside in the amount of r dollars (consisting of s dollars for an initial set-aside for the
tax year ending L and an addition of t dollars to the initial set-aside for the tax year ending M), in connection
with the construction of J in K to be used directly in carrying out your exempt purposes. It is anticipated J will
be completed by the end of N.

J will display cultural and educational exhibits, and will house a [ ], a cafe, and a gift shop. It
will also offer a number of multi-purpose spaces allowing for music, theater, and art performances and exhibits.
In addition, J will house an atrium, which will include a special area for [ ]
and [ ], an auditorium, flexible [ ], classrooms, and indoor and outdoor gathering
spaces for cultural engagement. Once J is constructed, you will operate and maintain J, which will be opened to
the general public.

The estimated cost for construction and completion of J is approximately p dollars and it is anticipated that
future funds for completion of the project will come from individual donors. The land for J has already been
acquired and construction thereon has begun. In addition, you have already funded and expended q dollars to
date for the project.

The construction of J is accomplished better by the set aside approach rather than immediate payment of funds
because although the construction on the project began in L, it is anticipated that the construction of J will not
be completed until N. Thus, the activities involved in the construction, furnishing and completion of J, will take
place over a period that spans years. Moreover, as is customary and appropriate in the construction of a
building facility, payments will be made by you on an "as work is done" basis, which will promote the proper
and timely completion of J. It is anticipated that expenditure of the requested set-aside for the construction,
furnishing and completion of J will not be made by you until the calendar years M and N. Given the foregoing,
the funding of the construction project can be better accomplished by the requested set-aside than the immediate
payment of funds. All decisions relative to construction, operation and maintenance of J and your programs
will be made by your governing body.

You provided a statement indicating that the set-aside will actually be paid within a specified time period not to
exceed 60 months from the date of the first 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 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