As we previously reported, the IRS has updated its guidance with helpful examples concerning program-related investments for private foundations. In its recently issued Notice 2015-62, the IRS provides further assurance that private foundations may take the accomplishment of charitable purposes into account in investing decisions, in addition to financial return.
Among other restrictions, private foundations are subject to Section 4944 of the Internal Revenue Code. Section 4944 imposes excise taxes on a private foundation that makes a “jeopardizing investment,” as well as on the foundation’s directors, officers, and management who knowingly participate in the making of the investment. Jeopardizing investments do not include “program-related investments.” These are investments made without any significant purpose of financial return. Notice 2015-62 does not address program-related investments; rather, it addresses investments having a charitable as well as financial purpose.
A jeopardizing investment is one that jeopardizes the foundation’s ability to carry out its exempt purposes. It occurs when, based on the facts and circumstances at the time the investment is made, the foundation fails to exercise ordinary business care and prudence in providing for its long-term and short-term financial needs in carrying out its exempt purpose. The regulations under Section 4944 provide that:
In the exercise of the requisite standard of care and prudence the foundation managers may take into account the expected return (including both income and appreciation of capital), the risks of rising and falling price levels, and the need for diversification within the investment portfolio (for example, with respect to type of security, type of industry, maturity of company, degree of risk and potential for return).
These criteria address the financial aspects of the investment but do not include whether the investment itself furthers exempt purposes.
Notice 2015-62 clarifies that in exercising ordinary business care and prudence concerning an investment, foundation managers may consider all relevant facts about the investment, including its relationship to achieving the foundation’s charitable purposes. Thus, an investment that furthers the private foundation’s charitable purposes but has a lower expected yield than another investment that does not further the foundation’s charitable purposes is not a jeopardizing investment. This is welcome guidance to foundation investment committees and boards, and is consistent with increased attention to purpose or mission investing.