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
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
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
- 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
- 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
- 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
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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