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June 6, 2023

IRS allows private foundation to set aside funds for developing novel therapies

  • The IRS granted a private foundation permission to set aside funds for developing drugs that will be used in two novel therapies that will benefit underserved regions of the world.
  • The set-aside will not cause the foundation to incur IRC Section 4942 excise tax on undistributed income.
  • Organizations should consider requesting a set-aside when appropriate.

In PLR 202321017, the IRS approved a private foundation's request to set aside funds under IRC Section 4942(g)(2) to pay for both the development of new therapies and the associated clinical trials over the permitted five-year payment period.


The mission of the private foundation is to (1) develop a facility that includes a museum and cultural learning center and (2) focus on global access to medicine and donations of assets and drugs to be used exclusively for charitable purposes.

The foundation will focus on global access to medicine by making "novel therapies highly affordable and accessible in the underserved regions of the world" and funding the development of drugs for two therapies for autoimmune disorders over the next five years. The foundation will provide funding to two different parties to complete drug manufacturing and clinical trials, which are expected to last through the set-aside period. The foundation will disseminate the research produced by the clinical trials to the public.

Applicable law

IRC Section 4942 generally requires a private foundation to make annual payments for charitable purposes (qualifying distributions) equal to at least 5% of the average fair market value of its investment assets in the preceding tax year, reduced by the debt incurred to acquire the property (distributable amount). IRC Section 4942 also imposes a 30% excise tax on the "undistributed income" of most domestic private foundations (i.e., the amount by which the foundation's minimum distributable amount each year exceeds its qualifying distributions for that year). However, a private foundation can avoid the excise tax on undistributed income if:

  • An amount set aside for a specific project is treated as a qualifying distribution under IRC Section 4942(g)(2)(A)
  • Its total qualifying distributions for the year that include the set-aside amount meet or exceed the minimum distributable amount for that year

A private foundation may treat such a set-aside amount as a qualifying distribution by establishing, to the satisfaction of the IRS, that it meets the "suitability test"; that is, the set-aside amount will be paid within 60 months of the date of the initial set-aside, and the project can be better accomplished by setting the funds aside rather than by distributing the funds immediately.


The IRS ruled that the set-aside was permissible and would not result in adverse tax consequences. Because the costs and development are estimated to occur over the next five years, the IRS concluded that the funds did not need to be disbursed currently. Further, the set-aside will give the foundation flexibility in making payments as milestones are achieved and will ensure the foundation's commitment to the next phases of development.

The ruling directs the foundation to:

  • Document the approved set-asides in the foundation's records as pledges or obligations
  • Pay the set-aside amounts within 60 months after the date of the first set-aside, as IRC Section 4942(g)(2) requires
  • Take into account both:
    • The set-aside amounts when determining the foundation's minimum investment return under IRC Section 4942(e)(1)(A)
    • Income attributable to the set-aside when computing the foundation's adjusted net income under IRC Section 4942(f)


The IRS's approval of the set-aside in PLR 202321017 serves as a useful blueprint for other private foundations making similar requests. A private foundation seeking to provide funding for specific projects should demonstrate how the projects further the foundation's charitable mission and substantiate how setting aside funds achieves a more impactful and efficient result than expending the funds within a single tax year. Private foundations should carefully document the set-aside funds so they can calculate qualifying distributions and undistributed income.

Set-asides can be a beneficial tool for foundations with long-term support projects, especially those struggling to meet their annual qualifying minimum distribution requirement. With careful planning, amounts set aside may result in qualifying distributions that can be carried forward for multiple years and further satisfy the minimum distribution requirement for those future years.


Contact Information
For additional information concerning this Alert, please contact:
Exempt Organization Tax Services
   • Stephen Clarke (
   • Melanie McPeak (
   • Morgan Moran (
   • Matt Case (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor