On April 19, 2012, the Department of the Treasury (“Treasury”) issued proposed regulations that provide additional examples of program-related investments (“PRIs”).  

Section 4944 of the Internal Revenue Code of 1986, as amended, imposes an excise tax on a private foundation that makes an investment that jeopardizes the foundation’s ability to carry out its charitable purposes (a “jeopardizing investment”). An investment that is a PRI is not treated as a jeopardizing investment. A PRI is an investment that satisfies three requirements: (1) the primary purpose of the investment is to further one or more of the foundation’s charitable purposes; (2) neither the production of income nor the appreciation of property is a significant purpose of the investment; and (3) the investment is not used for electioneering or lobbying activity.  

While the proposed regulations apply only to charitable organizations classified as private foundations, public charities that make distributions in the form of charitable loans and equity investments1 also look to these regulations for guidance regarding whether an investment serves a charitable purpose.  

The proposed regulations provide nine examples of investments that qualify as PRIs (the “Additional Examples”) to supplement the 10 PRI examples provided in the existing regulations.2

The Additional Examples reflect current investment practices and are meant to demonstrate that:

  • A PRI may be made for the charitable purpose of advancing science, combating environmental deterioration, promoting the arts, or alleviating the impacts of natural disasters.
  • An investment to fund activities in a foreign country may further the accomplishment of charitable purposes and hence qualify as a PRI.
  • PRIs may be achieved through a variety of investments, including loans to individuals, charitable organizations and for-profit organizations, and equity investments in forprofit organizations.
  • A credit enhancement arrangement may qualify as a PRI.
  • Neither the existence of a high potential rate of return nor the acceptance of an equity position in connection with the making of a loan will necessarily prevent an investment from qualifying as a PRI.
  • The provision of loans and capital to individuals or entities that are not themselves within a charitable class may nonetheless qualify as a PRI if the recipients are the instruments through which the private foundation accomplishes its charitable activities.  

In 2002, the American Bar Association Section of Taxation (the “ABA Tax Section”) submitted to the Internal Revenue Service and Treasury 19 proposed PRI examples. In 2010, the ABA Tax Section submitted 17 proposed PRI examples, which included updated versions of the 2002 examples as well as new examples. The Additional Examples include many but not all of the examples proffered by the ABA Tax Section. Some examples that were not included related to (1) a low-interest loan to fund the foreign affairs coverage of a daily newspaper; (2) a high-risk loan to a for-profit community development corporation to develop low- and moderate-income housing; and (3) loans to unemployed individuals or financial intermediaries for mortgage assistance purposes.  

The proposed regulations will be effective on the date they are published as final regulations in the Federal Register, but charitable organizations may rely on the Additional Examples before the proposed regulations are finalized.  

The Additional Examples are attached as Exhibit A.  

The proposed regulations can be found at http://www.ofr.gov/OFRUpload/OFRData/2012-09468_PI.pdf