United States: IRS Rationalizes Prudence Standards For Mission-Related Investments Of Private Foundations

Last Updated: September 25 2015
Article by Tomer J. Inbar and Justin Zaremby

Finally. On September 15th, the Internal Revenue Service (the "IRS") issued much anticipated guidance (the "IRS Notice") that should help facilitate mission-related investing by private foundations organized as corporations. Mission-related investments ("MRIs"), also known as "impact investments," provide an opportunity for charitable organizations to align their general investment activities – to varying degrees – with their mission. The IRS Notice clarifies that MRIs made by private foundations in a manner consistent with the prudence standards contained in the Uniform Prudent Management of Institutional Funds Act ("UPMIFA"), a version of which is in effect and applicable to nonprofit corporations in most states, should not be considered jeopardizing investments under Section 4944 of the Internal Revenue Code (the "Code"). By harmonizing the approach to prudence under the Code with the definitions found in most state nonprofit corporate law, the IRS has removed a degree of uncertainty that had an impact on the comfort level of some private foundations in making or deciding whether to make MRIs.

Under Code Section 4944 and the related Treasury Regulations, a foundation (and foundation managers) may be subject to excise taxes if the foundation makes an investment without exercising ordinary business care and prudence. The Code requires a foundation to analyze each investment based on the facts and circumstances prevailing at the time of the investment, in light of the portfolio as a whole, with an eye toward the long- and short-term financial needs of the foundation to carry out its exempt purposes. The Regulations provide that foundation managers may consider various factors, including expected return, the risks of rising and falling price levels, and the need for a diverse portfolio, and they subject certain investments perceived as high-risk to increased scrutiny. Program-related investments ("PRIs") – which are investments made primarily for charitable purposes where the production of income or appreciation of property is not a significant purpose – are an exception to the jeopardizing investment rules. However, other types of MRIs are not similarly protected and it was previously unclear whether and to what extent a foundation could choose to accept a lesser return from an investment that had a strong mission component, but did not otherwise qualify as a PRI. Accordingly, a foundation wishing to make a non-PRI impact investment (theoretically) risked triggering a tax under Section 4944 if it could not justify such investment using a purely "economic" prudence analysis.

While the federal tax law requirements applicable to mission-related investing were often viewed as antiquated, state law has increasingly made room for such investments. The adoption by most states of prudence standards in line with UPMIFA allows foundation managers of nonprofit corporations to consider, among other factors, an asset's "special relationship or special value, if any, to the charitable purposes of the institution." Thus, under UPMIFA (including New York's version of the statute) foundation managers may consider not only economic factors when creating an investment portfolio, but the degree to which individual investments align with the foundation's mission.

The IRS Notice fixes this disconnect – noting that the list of "facts and circumstances" specified in the Regulations is not exhaustive – and helpfully clarifies that a foundation will not be subject to the jeopardizing investment tax for an investment made in consideration of an asset's "special relationship or special value" if the investment was made through the exercise of ordinary business care and prudence under applicable state law, even if the investment is expected to yield a lower rate of return than more conventional investments.

The IRS Notice does not impact PRIs, nor does it provide any protection from liability for investments that would be considered imprudent under state or federal law generally. Thus, Section 4944 will still be available as an enforcement tool for the IRS to target egregious and imprudent investing practices.

Private foundations structured as charitable trusts should check applicable state law to determine whether UPMIFA-like standards are available. We note that while the Uniform Prudent Investor Act – the uniform law applicable to charitable trusts – has analogous language, individual states, including New York, may not have gone as far in their own statutes.

So what are the takeaways here? To put it simply, process matters (and is your friend if you want to make impact investments):

  • Make sure that your investment policy/statement addresses MRIs in the context of your overall investment strategy and approach, including asset allocation.
  • Articulate the general and/or specific aspects of mission alignment that you would like to see in an MRI or an MRI program and develop a process to ensure that such review is captured (and documented) as part of the investment process.
  • Make sure the people responsible for sourcing and making MRIs coordinate with your regular investment team (if they are different).
  • Lastly, periodically review your investment policy/statement to make sure it is current and reflects the needs (both mission-related and financial) of your foundation.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
McGuireWoods LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
McGuireWoods LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions