New examples describe additional charitable purposes and investment structures for PRIs.
The Internal Revenue Service (IRS) and the Treasury Department have issued long-awaited proposed Treasury Regulations providing nine additional examples of investments that qualify as program-related investments (PRIs). The existing regulations were issued in 1972 and do not reflect the types of PRIs that private foundations commonly employ today. The new guidance is welcome because it confirms that the IRS approves of many additional PRI activities. For example, the new examples show how PRIs can fund a wide range of charitable programs, including by supporting commercial businesses that serve as intermediaries to reach the intended charitable beneficiaries. The examples also demonstrate a variety of PRI investment structures, including equity investments, loans, loans with equity components, and guarantee arrangements.
While the rules that govern PRIs apply to private foundations, these new examples may also be useful for public charities that conduct PRI-like social and community investment activities.
The following is a summary of the key principles of the proposed regulations, together with our observations about the new guidance. The full text of the proposed regulations is available here.
Internal Revenue Code Section 4944 prohibits investments deemed to jeopardize the carrying out of a private foundation's exempt purposes. An investment meeting the PRI requirements is not a jeopardizing investment.
In general, an investment must satisfy three requirements to qualify as a PRI: (1) the primary purpose of the investment must further one or more exempt purposes of the foundation, (2) the production of income or the appreciation of property may not be a significant purpose of the investment, and (3) the PRI cannot be used to fund electioneering or lobbying activity.
Additional Charitable Purposes Illustrated
The nine new PRI examples in the proposed regulations (numbered sequentially after the existing 10 examples) show how different charitable purposes may be advanced by PRIs where the funding is used to support certain activities:
New Examples of Investment Structures
The proposed regulations also illustrate the following PRI investment structures:
General Guiding Principles
The additional examples also illustrate the following general principles:
We note that the proposed regulations are subject to further refinement, and the IRS has asked for comments from the field to assist them as they finalize the regulations. Please let us know if you would like assistance in preparing and submitting comments to the IRS.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis attorneys: