Thursday July 18, 2024

Private Letter Ruling

Foundation's Set-Aside Approved

GiftLaw Note:
Foundation is tax-exempt under Sec. 501(c)(3) and a private foundation under Sec. 509(a). Foundation requested approval to set aside funds as a grant to a public tax-exempt community foundation (CF) for the funding of a restoration project in Building. The restoration project includes, repairing and reproducing damaged historic finishes and decorative elements of Building to its original condition, consistent with the historic preservation standards. Foundation plans to make a matching grant to CF for the remaining estimated costs of the restoration if certain terms are met. CF will be required to raise the remaining costs for the project from donations and fundraising activities with the community. Foundation claims the project is better accomplished through a set-aside to allow Foundation to maintain preservation of control over the long-term project and for CF to fundraise the matching grants. Payments must be completed no later than 60 months from the date of the first set-aside.

Under Sec. 4942(g)(2)(A), an amount set aside for a specific project may be a qualifying distribution if it meets the requirements of Sec. 4942(g)(2)(B). Section 4942(g)(2)(B)(i) allows for a set-aside if the organization establishes that the amount will be paid within five years and the project can be better accomplished using the set-aside than by an immediate payment. Under Reg. 53.4942(a)-3(b)(2), projects that require long-term expenditures requiring more than one year's income may be better accomplished using a set-aside. Here, the Service determined that Foundation's restoration project of Building would be better accomplished by a set-aside rather than an immediate payment. As such, Foundation's request for a set-aside is approved.
PLR 202234011 Foundation's Set-Aside Request Approved

8/26/2022 (5/31/2022)

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 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.


Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Redacted Letter 4797
Letter 437

Published October 21, 2022

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