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Thursday March 21, 2019

Private Letter Ruling

Foundation's Set-Aside Approved

GiftLaw Note:
Organization is a tax-exempt private foundation under Sec. 509(a). Organization plans to create a set-aside program to facilitate the development of a mixed use cultural and arts facility. The facility will house galleries, classrooms, work spaces and theater rehearsal space. The facility will include a theater with seating for over 500 attendees and large arts-related spaces totaling over 16,000 square feet. Organization will set aside an initial amount in the first year with no planned additions in subsequent years. Organization expects to complete the project within four years. The amount set aside will be paid within a period of five years.

Under Sec. 4942(g)(2)(A), an amount set aside for a specific project, which includes one or more purposes described in Sec. 170(c)(2)(B), may be treated as a qualified distribution if it meets the requirements of Sec. 4942(g)(2)(B). Section 4942(g)(2)(B) provides that an amount set aside for a specific project will be permissible if, at the time of the set-aside, the foundation establishes that the amount will be paid within five years and either Sec. 4942(g)(2)(B)(i) or Sec. 4942(g)(2)(B)(ii) is satisfied. Under Sec. 4942(g)(2)(B)(i), the set-aside will be allowed if the project can be better accomplished using the set-aside than by making an immediate payment. Under Reg. 53.4942(a)-3(b)(1), a foundation can establish that a project may be better accomplished by a set-aside than by immediate payment if the set-aside meets Reg. 53.4942(a)-3(b)(2), which provides that specific projects better accomplished using a set-aside include those that will entail relatively long-term expenditures requiring more than one year's income. In Revenue Ruling 75-450, a foundation converted land to a public park pursuant to a four-year construction contract, which was considered a specific project under the set-aside rules. Here, the Service determined that Organization has shown that the set-aside, rather than an immediate payment, will better accomplish the goals of the project. Therefore, the Service approved the set-aside.
PLR 201904019 Foundation's Set-Aside Approved

1/25/2019 (11/2/2018)

Dear * * *:

Why you are receiving this letter


This is our response to your February 28, 2018, letter requesting approval of a set-aside under Internal Revenue Code Section 4942(g)(2). You've been recognized as tax-exempt under Section 501(c)(3) of the Code and have been determined to be a private foundation under Section 509(a).

Our determination


Based on the information furnished, your set-aside program is approved under Internal Revenue Code Section 4942(g)(2). As required under Section 4942(g)(2), the set aside amount must be paid within the 60-month period after the date of the first set-aside.

Description of set-aside request


You plan on facilitating the development of a mixed use cultural and arts facility to house galleries, classrooms, work spaces and a theater rehearsal space. This will include a 500+ seat theater and over 16000 square feet of arts-related space. This facility will be part of a redevelopment plan within the Y.

The initial amount to be set aside for this project is x dollars. Funds will mostly cover operating expenses in constructing the facility. You have no planned additions, solely to promote and advance interests in art, music, drama and theater. Being able to set aside these funds for this project will enable you to fulfill these purposes and serve the residents of Y

You expect the project to be completed within the next four years; as such, amounts set aside will be paid within a period of five years.

Basis for our determination


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

Section 4942(g)(2)(B) of the Code 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.

Section 4942(g)(2)(B)(i) of the Code 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.

Section 53.4942(a)-3(b)(1) of the Foundations and Similar Excise Taxes Regulations 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 Section 53.4942(a)-3(b)(2).

Section 53.4942(a)-3(b)(2) of the Foundations and Similar Excise Taxes Regulations 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 Internal Revenue Code Section 4942(g)(2).

What you must do


Your approved set-aside(s) will be documented on your records as pledges or obligations to be paid by the date specified. The amounts set aside will be taken into account to determine your minimum investment return under Internal Revenue Code Section 4942(e)(1)(A), and the income attributable to your set aside(s) will also be taken into account in computing your adjusted net income under Section 4942(f) of the Code.

Additional information


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

Please keep a copy of this letter in your records.

If you have any questions, please contact the person listed in the heading of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure

Published March 1, 2019
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