In Notice 2015-62, Investments Made for Charitable Purposes, the IRS announced that it will permit private foundations to make program related investment, without running afoul of the Jeopardy Investment rules. If the foundation uses ordinary business care, the IRS stated that the foundation would not need to worry about jeopardy investments and can consider the rate of return and the social impact of the investment.
PROGRAM RELATED INVESTMENTS
The Internal Revenue Code does not define the term Program Related Investments. The term has generally been understood to mean investments that have a general purpose, such as investing in a factory that will create jobs for people who are economically disadvantaged. The foundation doesn’t always have to balance competing interests, but there will be times that the foundation may need to balance return against its social impact.
The IRS states that “Jeopardizing investments generally are investments that show a lack of reasonable business care and prudence in providing for the long- and short-term financial needs of the foundation for it to carry out its exempt function.”
The IRS can impose substantial penalties under Internal Revenue Code section 4944 for making a jeopardy assessment. The IRS can impose a first tier tax of 10% of the relevant amount for each year in the taxable period. If the foundation doesn’t correct it within the taxable period, the IRS can impose a second tier tax of 25% of the investment amount. Managers and directors who participated in directing the investment can also be assessed penalties.
THE IRS CLARIFICATION
Notice 2015-62 confirms that under section 4944 of the Internal Revenue Code, private foundation managers may consider the relationship between a particular investment and the foundation’s charitable purpose when exercising ordinary business care and prudence in deciding whether to make the investment.”
In practical terms, it means that foundation managers can consider the social impact of the investment against the rate of return and not be subject to penalties under 4944, if they exercise ordinary business care in reaching the decision. This means that the IRS will follow a standard identical to the Uniform Prudent Management of Institutional Funds Act. The foundation doesn’t always have to look for the highest rate of return.
Prior to this announcement it was unclear what the IRS’ position was on balance return against social impact. The IRS’s goal in all this is to encourage foundations to broaden their social impact investing without fear of penalty. There are a number of legal and policy considerations to consider. Call for assistance.