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Volume XII, Number 334


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Proposed Regulations Offer New Examples of Program-Related Investments

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.

PRI Requirements

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 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 (Ex. 16)
  • 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 investment structures:

  • 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 principles:

  • 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 the IRS.

Copyright © 2022 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume II, Number 140

About this Author

Celia Roady, Morgan Lewis, tax lawyer

Celia Roady counsels tax-exempt organizations on tax and governance issues. Charities, foundations, colleges and universities, museums, and other nonprofits are among her clients. She regularly advises private foundations and public charities on operational and programmatic issues, including the structuring of complex grants, program-related investments, joint ventures and collaboration arrangements. Tax-exempt organizations turn to Celia for advice on issues such as executive compensation, private foundation excise taxes, unrelated business income, corporate...

Matthew Elkin, tax and corporate lawyer, Morgan Lewis

Matthew R. Elkin focuses his practice on tax and corporate matters affecting tax-exempt organizations, with an emphasis on transactional matters such as charitable investment funds, social enterprises, impact investing, and endowment investment programs and policies. He regularly represents private foundations, trade associations, healthcare organizations, colleges and universities, international development organizations, and medical research organizations. These organizations also turn to Matt for counsel in governance.

Alexander Reid, Tax attorney, Morgan Lewis

Alexander L. Reid advises tax-exempt organizations in planning, structuring, and transactional matters. He also represents taxpayers under audit, and helps organizations improve their governance and enhance their tax compliance. Alexander counsels taxpayers seeking administrative guidance from the Internal Revenue Service (IRS) and US Department of the Treasury, as well as on legislative matters with the US Congress. His tax-exempt clients include charities, foundations, colleges and universities, museums, and other nonprofit organizations.

Kimberly Eney, Morgan Lewis, Tax Attorney
Of Counsel

Kimberly Eney advises tax-exempt organizations on the tax and corporate laws integral to advancing their missions. Her clients include major private foundations, family foundations, media and sports organizations, museums and cultural associations, community and economic development organizations, colleges and universities, hospitals, scientific and medical research organizations, social welfare organizations, business leagues and trade associations, churches and religious organizations, and many other types of special-purpose organizations.​​