On April 18, 2012, the Internal Revenue Service released a Notice of Proposed Rulemaking that would add nine new examples of investments that qualify as “program-related investments” for private foundations. The proposed new examples illustrate different types of program-related investments that private foundations may make. The Notice was published in the Federal Register on April 19, 2012, at REG-144267-11.
Program-related investments generally and primarily accomplish a charitable purpose but are not usually entered into by the private foundation to produce income or generate other returns. Activities that qualify as program-related investments do not jeopardize the private foundation’s ability to carry out its exempt purposes and therefore are not subject to the excise tax on jeopardizing investments.
Generally, program-related investments also (1) are counted as “qualifying distributions” for the purposes of the private foundation minimum distribution requirements, (2) are excluded from the assets used to determine a private foundation’s distributable amount under the minimum distribution rules, (3) are not treated as business holdings for purposes of the private foundation excess business holdings rules, and (4) are not taxable expenditures, as long as the private foundation exercises expenditure responsibility where it is required to do so.
The proposed new examples include the following investments:
- The purchase of stock in a business that will develop a vaccine to prevent a disease that predominantly affects poor individuals in developing countries.
- The purchase of stock, or the provision of a loan with below-market interest rates accompanied by the acceptance of stock, in a business in a developing country that collects recyclable solid waste and delivers such waste to recycling centers that would otherwise be inaccessible to a majority of the population.
- A loan with below-market interest rates to a business in a rural area that employs a large number of poor individuals, where the business has sustained damage from a natural disaster.
- A loan with below-market interest rates to individuals in a developing country that was damaged by natural disaster, for the purpose of starting small businesses.
- A loan with below-market interest rates to a company that purchases coffee from farmers in a developing country, for the purpose of training poor farmers about water management, crop cultivation, pest management, and farm management.
- A loan with below-market interest rates to an organization described in Internal Revenue Code section 501(c)(4) that develops and encourages interest in painting, sculpture, and art by conducting weekly community art exhibits, for the purchase of a large exhibition space.
- A deposit as security, or a guarantee and reimbursement agreement, for a loan to a charitable organization described in Internal Revenue Code section 501(c)(3) that provides child care services in a low-income neighborhood, for the construction of a new child care facility.
The proposed examples demonstrate that a wide variety of charitable purposes may be served by program-related investments, including advancing science, combating environmental deterioration, and promoting the arts, in addition to the purposes demonstrated by the examples in the current Treasury Regulations, such as providing relief to economically-disadvantaged individuals or preventing deterioration of urban areas.
The proposed examples also clarify that program-related investments may include activities in other countries and may consist of credit enhancement activities and acceptance of equity positions in businesses in combination with loans. One example includes facts that indicate that a potentially high rate of return does not, by itself, automatically disqualify an investment from being program-related.
The Notice of Proposed Rulemaking states that taxpayers may begin to rely on the proposed examples now, even though they will not be effective until the Treasury publishes them as final regulations.
The IRS has requested comments on all aspects of the proposed examples. Comments must be submitted to the IRS by July 18, 2012, and may be submitted in writing to the following address: CC:PA:LPD:PR (REG-144267-11), Room 5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Comments may also be submitted electronically via the Federal eRulemaking Portal under IRS REG-144267-11. All comments submitted will be made available for public inspection and copying.
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