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The IRS recently issued proposed regulations that provide new
examples that illustrate what types of investments qualify as
"program-related investments" (PRIs). These new examples
are based on published guidance and on financial structures that
had previously been approved in private letter rulings.
Program Related Investments—In General
Excise taxes are imposed on private foundations, as well as
their managers, for making investments that jeopardize the carrying
out of the private foundation's exempt purposes. Generally,
such "jeopardizing investments" occur when foundation
managers fail to exercise ordinary business care and prudence in
providing for the long- and short-term financial needs of the
private foundation.
PRIs are exempt from being treated as jeopardizing investments.
In general, PRIs are defined as investments that (1) have the
primary purpose to accomplish one or more "charitable"
purposes, (2) do not have the significant purpose of producing
income or appreciating property, and (3) do not support legislation
or political campaigns.
Using PRIs can be a great way for a private foundation to
stimulate and advance charitable objectives. High-profile private
foundations using PRIs include the Bill and Melinda Gates
Foundation.
The Proposed Regulations
The proposed regulations do not modify the existing
regulations—instead, they provide new examples of
investments that qualify as PRIs by illustrating certain principles
and current investment practices. While the examples in the
existing regulations focus on domestic situations principally
involving economically disadvantaged individuals in deteriorated
urban areas, the new examples illustrate a broader range of
situations more likely to be encountered in practice:
PRIs can be achieved through a variety of investments, such as
loans to individuals, tax-exempt organizations, and for-profit
organizations, as well as equity investments in for-profit
organizations.
A private foundation's acceptance of an equity position in
conjunction with making a loan does not necessarily prevent such
investment from qualifying as a PRI.
A credit enhancement arrangement (such as a deposit agreement
or a guarantee agreement) may qualify as a PRI.
A potentially high rate of return does not automatically
prevent an investment from qualifying as a PRI.
The charitable purposes that a PRI may serve are broad, and
include advancing science, combating environmental deterioration,
and promoting the arts.
Activities conducted in foreign countries are considered to
further a charitable purpose so long as the same activities would
further a charitable purpose in the U.S.
The recipients of PRIs do not need to be within a charitable
class if they are the instruments for furthering a charitable
purpose. For example, an investment in a for-profit that develops
new drugs may qualify as a PRI if the for-profit business agrees to
use the investment to develop a vaccine that will be distributed to
poor individuals at an affordable cost.
Private foundations are permitted to rely on the new examples,
even though the proposed regulations will not be effective until
the Treasury publishes them as final regulations.
Benefits of Program Related Investments
PRIs receive special tax treatment, such as:
PRIs are excluded from the assets that a private foundation
takes into account when determining its "distributable
amount" for the taxable year.
PRIs are excluded from being treated as "business
holdings" subject to excise tax.
PRIs are generally treated as "qualifying
distributions" for purposes of private foundation distribution
requirements.
PRIs do not constitute "taxable expenditures"
provided that "expenditure responsibility" is exercised
by the private foundation when required.
The new examples will be helpful to private foundations in
determining if their investments may qualify as a PRI and receive
such beneficial tax treatment.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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