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Sunday March 7, 2021

Private Letter Ruling

Set-Aside Approved for Research Facility

GiftLaw Note:
Organization, a private foundation, requested advanced approval of a set-aside. Organization provides education and scientific grade research. Organization plans to set aside funds to upgrade a research facility to enable astronomical research, including an area to house a telescope and observatory building. The funding for the new and upgraded research facility will be generated from outside sources. On a prior date, Organization requested a set-aside, which was previously approved. The previous set-aside funds were spent related to this project for engineering costs, pre-construction permit, licenses and preordered items. Organization requests approval of additional set-aside funds for the continuing needs of the project.

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 qualifying distribution if it meets the requirements of Sec. 4942(g)(2)(B). An amount set aside for a specific project may be treated as a qualifying distribution if the amount will be paid within five years and if either Sec. 4942(g)(2)(B) (i) or (ii) is satisfied. 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. Regulation 53.4942(a)-3(b)(1) states a private foundation may establish a project as being better accomplished by a set-aside than by immediate payment if the set-aside satisfied the suitability test in Reg. 53.4942(a)-3(b)(2). Regulation 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. Here, the Service approved the set-aside as a qualifying distribution meeting the suitability test.
PLR 202049004 Set-Aside Approved for Research Facility

12/4/2020 (9/8/2020)

Dear * * *:

Why you are receiving this letter


This is our response to your December 10, 2019 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 were formed under the laws of B around W and are recognized as an organization described in Internal Revenue Code Section 501(c)(3) and as a private foundation within the meaning of IRC Section 509(a).

You provide education in * * * to the citizens of B and scientific grade * * * research. You host many school and youth groups and provide various public programs. In the area of scientific research, you have worked with D and other institutions and are presently the headquarters of F, G in partnership with H and a member of J.

To keep current in astronomical research, you have embarked on a project to upgrade your facility with a modern, * * * and specially designed * * * to house the * * * at C. The telescope and observatory building will be fabricated by K and take approximately * * * years to complete.

The cost of the new * * * will be approximately m to n dollars. Funding will come from you and from outside sources. To start the funding process, you requested a set-aside in P of q dollars for which we previously approved. In S, you spent r dollars of the q dollars set aside for this project related to engineering costs, pre-construction permits/licenses and preordering of * * *.

For S, you requested an additional t dollars in set-aside for this project. The actual construction will start in X. At that time, there will be numerous expenses for contracts that have been already set in place.

K estimates the fabrication of the * * * will take approximately * * * years from the time construction breaks ground in X. An additional year will be required for the on-site work of constructing the foundation for the * * * and erecting the * * *.

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. We have sent a copy of this letter to your representative as indicated in your power of attorney.

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:
Notice 437

Published December 11, 2020
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