IRS Issues Final Regulations with Examples of Private Foundation Program-Related Investments

The Treasury Department and Internal Revenue Service published updated Program-Related Investments regulations (T.D. 9762), effective April 25, 2016. The regulations relate to the jeopardizing investments rules that apply to 501(c)(3) organizations that are classified as private foundations. Violating these rules can subject the foundation to excise taxes under Sec. 4944(a) of the Internal Revenue Code.

The final regulations adopt, with some modifications, proposed regulations that were released in April 2012. The regulations broaden the types of investments that private foundations may make without running afoul of the jeopardizing investments rules.

In general, a program-related investment is a loan or capital investment that a private foundation makes with the primary purpose of furthering its charitable purposes, rather producing income. PRIs may not be made to influence legislation or in connection with political campaigns.

More specifically, a PRI is a loan or investment with the following characteristics:

  • The primary purpose is to accomplish one or more of the foundation’s exempt purposes,
  • Production of income or appreciation of property is not a significant purpose, and
  • Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose.

Program-related investments:

  • Are exempt from excise taxes that apply to jeopardizing investments
  • Are qualifying distributions for purposes of the excise tax on failure to distribute income
  • Are excluded from the foundation’s investment base in calculating its minimum payout

To be program-related, the loan or investment must significantly further the foundation’s exempt purposes. That is, the investment would not have been made except for its relationship to the foundation’s exempt purposes. This includes investments in functionally related activities carried on within a larger combination of similar exempt-purpose activities.

The following are some typical examples of program-related investments:

  1. Low-interest or interest-free loans to needy students,
  2. High-risk investments in nonprofit low-income housing projects,
  3. Low-interest loans to small businesses owned by members of economically disadvantaged groups, where commercial funds at reasonable interest rates are not readily available,
  4. Investments in businesses in low-income areas (both domestic and foreign) under a plan to improve the economy of the area by providing employment or training for unemployed residents, and
  5. Investments in nonprofit organizations combating community deterioration.

The final regulations contain nine detailed examples of investments that qualify as program-related investments, illustrating the wide range of possible PRIs and reflecting current investment practices, including the following:

  • PRIs can be achieved through a variety of investments, including loans to individuals, tax-exempt organizations and for-profit organizations, and equity investments in for-profit organizations,
  • Charitable goals advanced through a PRI may be carried out both in the United States or in foreign countries.
  • The recipients of the PRI do not have to be within a charitable class if the ultimate outcome of the investment furthers an exempt purpose,
  • A potentially high rate of return does not automatically prevent an investment from qualifying as program-related

The final regulations follow guidance issued last year (Notice 2015-62) clarifying that private foundations may consider the relationship between an investment and the foundation’s charitable purposes for any investment, even those that are not PRIs. The 2015 guidance clarified that foundation managers are not required to select only investments that offer the highest rates of return, the lowest risks, or the greatest liquidity, provided that the foundation managers have otherwise adhered to the applicable standards and fiduciary duties in making the investment decision and in determining that the investment will not jeopardize the foundation’s charitable purposes (a “facts and circumstances” determination).