Yesterday, Treasury and the Internal Revenue Service (IRS) finalized the regulations describing nine new program-related investment (PRI) examples that were first proposed on April 19, 2012. The final regulations incorporate several helpful amendments that were requested by comments received in response to the proposed regulations. As is evident in the White House blog post announcing the new regulations and the preamble to the final regulations, the revisions reflect the eagerness of the Obama administration, Treasury, and the IRS to remove confusion and provide comfort in order to make it easier for foundations to use a wide variety of financial investment tools to accomplish the full range of their charitable purposes.
The key amendments are as follows:
- Example 11, which involved a private foundation’s investment in a subsidiary of a drug company for the development of a vaccine for a disease that predominantly affects poor individuals in developing countries, was amended to clarify that the subsidiary can sell the vaccine to those who can afford it at fair market prices, in addition to distributing the vaccine to the poor at a price that is affordable to them.
Although Treasury declined to implement one commenter’s request to remove from the fact pattern the requirement that the subsidiary publish its research results, the preamble explicitly allows that other fact patterns that do not contain all of the same elements as those illustrated in the example may nonetheless further an exempt purpose.
- Example 13, involving a private foundation that accepts common stock in a business enterprise as part of a loan to the business, was amended to delete the fact that the foundation planned to liquidate the stock as soon as the business became profitable.
With this deletion, Treasury and the IRS acknowledge that no such commitment to liquidate is necessary for an investment to qualify or continue to qualify as a PRI, but they do note in the preamble that the establishment, at the outset, of an exit condition “that is tied to the foundation’s exempt purpose in making the investment” can be an important indication that the foundation’s primary purpose in making the investment is, in fact, an exempt one.
- Example 15, which involved loans to two poor individuals running small businesses in a developing country where a natural disaster occurred, was amended to refer to loans to poor individuals and small businesses in general, rather than two specific individuals with identified business endeavors, and to eliminate the reference to the natural disaster, recognizing that such disaster was unnecessary to establish the charitability of the investment.
In addition, the preamble reaffirms the assurances that were first made in the preamble of the proposed regulations, namely, that:
- PRIs may be used as a tool to accomplish a variety of exempt purposes, including scientific research in the public interest, combating environmental deterioration, and education – which are addressed in the examples – as well as many exempt purposes which are not explicitly addressed.
- PRIs may take many financial forms, including an equity position in conjunction with a loan and credit enhancement arrangements, and may earn a high potential return.
- PRIs may be made to individuals or for-profit entities if the recipients are the tools through which exempt purposes are accomplished.
- An activity conducted in a foreign country furthers an exempt purpose if the same activity would further an exempt purpose if conducted in the U.S. (Conversely, the preamble to the final regulations adds that scientific research carried on for the purpose of discovering a cure for a disease need not involve a disease predominantly affecting developing countries to accomplish an exempt purpose; rather it may also accomplish exempt purposes if it involves a disease that affects developed countries but with respect to which a lack of sufficient market incentives for research and development of new treatments exists.)
Coming on the heels of the mission-related investment guidance issued by Treasury and IRS last fall and the recently issued Department of Labor guidance making it easier for retirement plans to engage in impact investing, these new and improved PRI examples are yet another indication of a policy environment that is growing more and more conducive to the use of innovative financial tools to achieve charitable goals.
The final regulations are scheduled to be published and become effective this Monday, April 25, 2016.