Foundation Wins Set‐Aside, Long Extension of It, for Complex Student Debt‐Reduction Program

DOIhttp://doi.org/10.1002/npc.30237
Date01 September 2016
Published date01 September 2016
Bruce R. Hopkins’ NONPROFIT COUNSEL
5
September 2016
THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY
Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc
Pursuant to this individual’s will, the membership
interest in the company passed to the estate. On dis-
solution of the company, its property is to be distributed
to the private foundation. Neither the company, estate,
nor foundation is providing any services in relation to the
legal services that generated the Receivables. The foun-
dation represented to the IRS that it will not perform any
act with respect to the Receivables other than receiving
them, the Receivables are not gains or losses from the
disposition of any property or gains or losses from the
lapse or termination of options to buy or sell securities,
and the Receivables are not debt-financed property.
Law and Analysis
The IRS observed that the legal services provided by
the company that resulted in the Receivables would be
a trade or business if provided by the foundation, were
regularly carried on, and were not related to the foun-
dation’s exempt purpose. The legal services have been
completed; the foundation is not engaged in any activ-
ity regarding the Receivables but is merely the passive
recipient of the income. Thus, the income resulting from
the Receivables was held to not be unrelated business
income. [25.1(a)]
FOUNDATION WINS SET-
ASIDE, LONG EXTENSION OF
IT, FOR COMPLEX STUDENT
DEBT-REDUCTION PROGRAM
The IRS issued a private letter ruling approving a
set-aside of funds (IRC § 4942(g)(2)), as well as finding
good cause for a significant extension of time for paying
them, in connection with a student debt-reduction pro-
gram for science, technology, engineering, and math-
ematics (STEM) workers who agree to live and work for
10 years in a state (Priv. Ltr. Rul. 201627005).
Facts
This program is administered by a state agency. The
private foundation involved has committed an amount
of money to fund this program, which will be paid to a
supporting organization of the agency. This organization
will make the debt-reduction payments. The agency will
promote the program, along with a student loan con-
solidation and refunding program involving participating
qualified lenders. The IRS noted the “complex, multi-
party nature” of this program and this “unique private
and public sector collaboration.” The foundation’s fund-
ing commitment is for one year, although it wants this
set-aside time extended beyond five years.
The foundation and agency will establish an advisory
committee to provide “programmatic leadership” to the
program. This committee will represent a “broad cross
section of STEM constituencies.” The agency will be
required to communicate regularly with the foundation
on the status of the program according to reporting
requirements.
This program will be open to individuals who (1) are
residents of the state or will be once hired by a state-
based employer, (2) are or will be employed in a STEM
occupation, and (3) have a higher education degree
or certification. There will be extensive recruitment for
the program. Once an individual is accepted into the
program, he or she will remain in it, and continue to
receive debt-reduction payments, as long as the eligibil-
ity requirements are met. The foundation will grant to
the supporting organization amounts on behalf of those
who have satisfied these requirements. Use of the funds
will be the subject of a “control agreement” involving
the foundation, the supporting organization, and a
bank. The foundation will grant additional amounts to
sustain the program, which will conclude after 10 years.
This program is designed to attract more STEM
employees to the state and enhance the quality of life
there. Lenders and borrowers need to be assured that
the debt-reduction payments will be timely made. For
underwriting purposes, the existence of the set-aside
and the associated funding will function like a guarantee
or a reserve fund, whereas a mere charitable pledge in
years 5 and 10 would not. The case was made to the
IRS that the set-aside will best accomplish the purposes
of the program.
Law
An amount set aside for a specific project entailing
the furtherance of charitable purposes is treated as a
qualifying distribution if it meets certain requirements
(IRC § 4942(g)(2)(A)). At the time of the set-aside, the
foundation must establish that the amount involved
will be paid within five years (IRC § 4942(g)(2)(B)). For
purposes of this type of set-aside (the suitability test),
the foundation must show that the project is one
that can better be accomplished using the set-aside
approach than by making an immediate payment. The
better-accomplished standard is satisfied where there
are projects involving the making of relatively long-term
expenditures requiring more than one year’s income to
assure their continuity (Reg. § 53.4942(a)-3(b)(2)).
A set-aside may have its period to pay extended
if good cause is shown. This is done by providing a
statement explaining why the set-aside payment period
should be extended, specifying the requested extension
of time (Reg. § 53.4942(a)-3(b)(7)(i)(e)).
The statutory law, its legislative history, and the tax
regulations do not prescribe, in the language of this pri-
vate letter ruling, an “outer limit or maximum duration”
for an extension of a set-aside.

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