CHAPTER EIGHT
Jeopardizing Investments
§ 8.1 GENERAL RULES
(a) Defining Jeopardy
p. 356, last paragraph. Insert as last sentence:
In connection with a ruling holding that a private foundation's ownership of a blocker corporation was not a jeopardizing investment, the IRS observed that the foundation's managers determined that its foreign investments can be better managed, result in a more tax-efficient structure, and enhance the foundation's ability to fulfill its charitable mission by means of the corporation, and that the foundation worked closely with its investment advisors in making this determination.15.1
§ 8.2 PRUDENT INVESTMENTS
p. 373. Insert following second complete paragraph, before heading:
(g) Mission-Related Investments
The IRS published guidance on application of the jeopardizing investments rules to investments that are made by private foundations for charitable purposes.49.1 This development is inapplicable to program-related investments.49.2
Pursuant to the tax regulations, an investment made by a private foundation is not considered a jeopardizing investment if, in making the investment, the foundation managers exercise ordinary business care and prudence (under the circumstances prevailing at the time of the investment) in providing for the long-term and short-term financial needs of the foundation to carry out its charitable purposes.49.3 Although the regulations list some factors that managers generally consider when making investment decisions, the regulations do not provide an exhaustive list of facts and circumstances that may properly be considered.
When exercising ordinary business care and prudence in deciding whether to make an investment, foundation managers may consider all relevant facts and circumstances, including the relationship between a particular investment and the foundation's charitable purposes. Foundations are not required to select only investments that offer the highest rate of return, the lowest risks, or the greatest liquidity as long as the foundation managers exercise the requisite ordinary business care and prudence under the facts and circumstances prevailing at the time of the investment in making investment decisions that support, and do not jeopardize, the furtherance of the private foundation's charitable purposes.
For example, a private foundation will not be subject to a jeopardizing investment tax if foundation managers who have exercised ordinary business care and prudence make an investment that furthers the foundation's charitable purposes at an expected rate of return that is less than what the foundation might obtain from an investment that is unrelated to its charitable purposes.
The IRS noted that the foregoing standard is consistent with state-law investment standards, which generally provide for the consideration of the charitable purposes of an organization or certain factors, including an asset's special relationship or special value, if any, to the organization's investment assets. The agency cited the Uniform Prudent Management of Institutional Funds Act and pertinent comments in support of this observation.49.4
§ 8.3 PROGRAM-RELATED INVESTMENTS
p. 377. Insert following last bullet point:
- Pledging of marketable securities as collateral in support of issuance of a bond for the benefit of a tax-exempt hospital that is building an acute care hospital.73.1
pp. 377–378. Delete text following last bulleted paragraph on p. 377 and first paragraph on p. 378, and insert:
The Department of the Treasury and the IRS, on April 24, 2016, issued final regulation that provide additional guidance as to what constitutes program-related investments.74 This guidance provides nine additional examples75 illustrating that an activity conducted in a foreign country furthers a charitable purpose if the activity would further a charitable purpose if conducted in the U.S., such as scientific research and enhancement of the environment; the exempt purposes served by a program-related investment are not limited to situations involving economically disadvantaged individuals and deteriorated urban areas; the recipients of program-related investments need not be within a charitable class if they are the instruments for furthering an exempt purpose; a potentially high rate of return does not automatically prevent an investment from qualifying as a program-related investment; program-related investments can be achieved through a variety of investments, including loans to individuals, tax-exempt organizations, and for-profit entities, and equity investments in for-profit organizations; a credit enhancement arrangement, such as a guarantee and reimbursement arrangement, may qualify as a program-related investment; and the acceptance by a private foundation of an equity position in conjunction with making a loan does not necessarily prevent the investment from qualifying as a program-related investment.