Final rules permit broader range of program-related investments.

• Author: Schreiber, Sally P.

The IRS finalized regulations (T.D. 9762) broadening the types of investments by private foundations that qualify as program-related investments that do not jeopardize the carrying out of a private foundation's exempt purposes (jeopardizing investments). Jeopardizing investments are subject to an excise tax under Sec. 4944(a).

Under Sec. 4944(c), to be program-related investments, investments must meet the following requirements: (1) The primary purpose of the investment is to accomplish one or more of the purposes described in Sec. 170(c)(2)(B) (religious, charitable, scientific, literary, educational purposes, amateur sports, or the prevention of cruelty to animals); and (2) no significant purpose of the investment is to produce income or result in the appreciation of property. However, the fact that an investment produces significant income or capital appreciation will not, absent other factors, disqualify the investment.

The final regulations add nine examples to the existing rules to update what types of investments qualify. Regulations in effect since 1972, which contained nine examples of program investments that qualify and one that did not, were primarily concerned with domestic investments in programs involving economically disadvantaged individuals and deteriorated urban areas.

The new examples demonstrate that program-related investments may accomplish a variety of exempt purposes besides aiding economically disadvantaged individuals and deteriorated urban areas, may fund activities in one or more foreign countries, and can earn a high potential rate of return. A program-related investment may take the form of an equity position when making a loan, and a private foundation's provision of credit enhancements can qualify as a program-related investment. Loans and capital are permitted to be provided to individuals or entities that are not within a charitable class themselves if the recipients are the instruments through which the private foundation accomplishes its exempt activities.

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