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
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
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
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
The nine new PRI examples in the proposed regulations (numbered
sequentially after the existing 10 examples) show that how
different charitable purposes may be advanced by PRIs where the
funding is used to support certain activities:
Advancing science by funding published research and the
development of drugs to treat diseases that predominantly affect
the poor (Ex. 11)
Combating environmental deterioration by funding a recycling
business (Ex. 12 and 13)
Providing relief to the poor by (i) funding a failing business
that employs a large number of poor individuals (Ex. 14) or (ii)
funding small businesses started by the poor (Ex. 15)
Educating poor farmers about advanced agricultural methods by
funding a commercial enterprise to provide training to the farmers
Promoting the arts by funding the purchase of space to be used
for art exhibitions (Ex. 17)
Advancing education by providing funding to a Section 501(k)
childcare organization (Ex. 18 and 19)
New Examples of Investment Structures
The proposed regulations also illustrate the following PRI
An equity investment in a subsidiary of a commercial enterprise
where the subsidiary was established to carry on the activities
that further charitable purposes (Ex. 11)
An equity investment (or loan with an equity component) in a
commercial business whose only activity will be the activity that
supports the charitable purposes (Ex. 12 and 13)
A loan to a distressed business enterprise that will enable it
to continue its business operations (Ex.14)
A loan to poor individuals that will enable them to start a
small business (Ex. 15)
A loan to a business where the loan proceeds are required to be
used for training the poor suppliers of the borrower (Ex. 16)
A credit support which may be collateralized (Ex. 18) or
subject to a reimbursement agreement (Ex.19)
General Guiding Principles
The additional examples also illustrate the following general
An investment that funds activities in foreign countries may
further the accomplishment of charitable purposes and qualify as a
PRI (Ex12,13, 15, and 16).
The existence of a high potential rate of return on an
investment does not, by itself, prevent the investment from
qualifying as a PRI (Ex. 12).
A private foundation's acceptance of an equity position in
conjunction with making a loan does not necessarily prevent the
investment from qualifying as a PRI (Ex. 13).
A private foundation's provision of a guarantee or other
credit support can qualify as a PRI (Ex. 18 and 19).
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
Copyright 2012. Morgan, Lewis & Bockius LLP. All Rights
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Form 8938 (Statement of Foreign Financial Assets), introduced in 2011 as part of the Foreign Account Tax Compliance Act (FATCA), requires taxpayers to report their foreign assets, subject to minimum values, and indicate where the related income is picked up on their tax return.