Today, the IRS released Notice 2015-62, which confirms that, under section 4944, private foundation managers may consider the relationship between a particular investment and the foundation’s charitable purpose when exercising ordinary business care and prudence in deciding whether to make the investment.  Section 4944(a)(1) imposes an excise tax on a private foundation that invests “any amount in such a manner as to jeopardize the carrying out of any of its exempt purposes.”  Section 4944(c) provides an exception for program related investments (PRIs), which are defined as “investments, the primary purpose of which is to accomplish one or more of the purposes described in section 170(c)(2)(B), and no significant purpose of which is the production of income or the appreciation of property.”

The notice addresses whether an investment made by a private foundation that furthers its charitable purposes, but is not a PRI because a significant purpose of the investment is the production of income or the appreciation of property, is subject to tax under section 4944.  Under the section 4944 regulations, an investment made by a private foundation will not be considered a jeopardizing investment if, in making the investment, the foundation managers exercise ordinary business care and prudence (under the circumstances prevailing when the investment is made) in providing for the long-term and short-term financial needs of the foundation to carry out its charitable purposes.  According to the notice, “a private foundation will not be subject to tax under section 4944 if foundation managers who have exercised ordinary business care and prudence make an investment that furthers the foundation’s charitable purposes at an expected rate of return that is less than what the foundation might obtain from an investment that is unrelated to its charitable purposes.”  The notice further provides that “[t]his standard is consistent with investments standards under state laws…See, e.g., Unif. Prudent Mgmt.  of Institutional Funds Acts §§ 3(a), 3(e)(1)(H) and accompanying comments…”