IRS Finalizes Rules for Foundation Investments

The Internal Revenue Service has released final regulations providing guidance to private foundations on program-related investments.

In T.D. 9762, the IRS offers a series of examples illustrating investments that qualify as program-related investments. In addition to private foundations, the final regulations affect foundation managers who participate in the making of program-related investments.

Section 4944 of the Tax Code imposes an excise tax on a private foundation that makes an investment that jeopardizes the carrying out of its exempt purposes but provides that program-related investments are not considered to be jeopardizing investments. No significant purpose can be the production of income or the appreciation of property. The regulations provide that an investment is primarily made to accomplish one or more exempt purposes if it significantly furthers the accomplishment of the private foundation’s exempt activities and would not have been made but for the relationship between the investment and the accomplishment of those exempt activities.

The IRS issued a notice of proposed rulemaking in April 2012 describing proposed regulations and nine proposed examples. The proposed examples demonstrated that program-related investments can accomplish a variety of exempt purposes (and are not limited to situations involving economically disadvantaged individuals and deteriorated urban areas), may fund activities in one or more foreign countries, and earn a high potential rate of return.

The proposed examples also illustrated that a program-related investment can take the form of an equity position in conjunction with making a loan, and that a private foundation’s provision of credit enhancements can qualify as a program-related investment.

In addition, the examples illustrated that loans and capital can be provided to individuals or entities that are not within a charitable class themselves, if the recipients are the instruments through which the private foundation accomplishes its exempt activities. The final regulations take into account the 15 comments received by the IRS on the proposed regulations.

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