In PLR 201627005, the IRS has approved under Section 4942(g)(2) a private foundation's set-aside program to fund a student debt reduction program, and also granted, for good cause shown, an extension of time to pay out the set-aside amounts.

Facts

PF, a tax-exempt private foundation under Section 509(a), plans to commit funds to a student debt reduction program. The program will assist individuals who commit to living in a specified state and working in a science, technology, engineering and mathematics (STEM) position in that state for 10 years. Individuals must apply for the program. There will be up to six application cycles for enrolling into the program, running over a rolling three-year application period. Applications accepted during each application cycle are referenced as a different program "Cohort." For individuals that are accepted into the program and remain eligible, the program will provide student debt repayment assistance over 10 years, as required by the various lenders participating in the program. Each Cohort will last 10 years, and the program will conclude following the final 10-year payment for the last application Cohort.

Due to the three-year application period and subsequent 10 years of debt repayment, PF stated that the entire program must continue for a total of 14 years. In this regard, PF noted that the typical student loan refinancing has a term of at least 10 years, and completing the program in sequential five-year terms is not practicable since a lender won't underwrite for the first five years of a refinanced student loan and then reevaluate and underwrite again for the second five years of the loan term. To allow for competitive loan terms and a pool of qualified lenders required for the success of the program, the duration of the grant commitment and the underlying student refinanced debt need to match. The realities of the program and the timeline required to foster the charitable objectives of the refinancing necessitated that each Cohort have a set-aside duration of 10 years, allowing the program itself a cumulative 14-year life.

PF requested an advance ruling that the proposed set-aside is a charitable qualifying distribution under Section 4942(g), and also requested an extension beyond five years to distribute the amounts set aside for each Cohort under the program.

Law

Under Section 4942(g)(2)(B)(i), an amount set aside for a specific project may be treated as a qualifying distribution if, at the time of the set-aside, the foundation establishes to the satisfaction of the Secretary that the amount set aside will be paid within five years, and the specific project is one that can better be accomplished by the set-aside of income rather than by the immediate payment of funds (the suitability test).

Treas. Reg. Section 53.4942(a)-3(b)(2) states that the suitability test for a set-aside is met if the foundation establishes that the specific project is one in which relatively long-term grants or expenditures must be made to assure the continuity of particular charitable projects or program-related investments, or when grants are made as part of a matching grant program.

Under Section 4942(g)(2), the Secretary may grant an extension of five years for paying out a set-aside for good cause shown. Reg. Section 53.4942(a)-3(b)(7)(i)(e) requires organizations to provide a statement showing good cause as to why the set-aside payment period should be extended, specifying the requested extension of time.

Ruling

The IRS approved PF's set-aside program under Section 4942(g)(2) based on the information provided. In addition, it determined that PF established good cause to extend the time to pay out each Cohort set-aside for 60 months beyond the five-year set-aside timeline provided in Section 4942(g)(2).

Implications

This PLR offers insight into what may qualify for good cause when requesting a lengthy extension for a private foundation set-aside program. Generally, under Section 4942(g)(2), a private foundation may only set aside a qualifying distribution for a specific project for five years; in this instance, however, the IRS granted a 60-month extension to each Cohort refinancing, allowing the program a 14-year total life.

Several factors weighed in favor of good cause for the foundation. The IRS pointed out that the legislative history of Section 4942(g) states that an extension is appropriate when longer-term grants are necessary to support the continuity of certain charitable programs. In particular, as detailed in the PLR, this program's charitable objectives would be impossible over a period that is anything less than the expected duration of the underlying refinanced student loans. The IRS also considered that the program collaborated with a state agency, and therefore the state's Attorney General would have a direct role in ensuring grant commitments are distributed in accordance with the program's charitable purpose.

A private letter ruling is a written statement issued to a particular taxpayer that interprets and applies tax laws to the taxpayer's specific, represented set of facts, and may not be used or cited as precedent by other taxpayers or by IRS personnel. Thus, although the ruling is instructive on the factors the IRS might consider in ruling on an extension beyond the five-year set-aside period, organizations are cautioned not to rely on the ruling as authority, but should consult with their tax advisors to determine the tax consequences of their own facts and circumstances.

Please contact your Ernst & Young tax professional with any questions.

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