Private Foundations: A Trend Towards Program Related Investments

A program related investment (PRI) is a powerful tool for a private foundation to positively influence social enterprise while advancing its philanthropy and satisfying its 5% annual minimum distribution requirement.

Traditionally, private foundations have used grant-making activities as the primary means to satisfy their 5% annual minimum payout requirement and to accomplish their tax exempt purposes. However, modern trends reveal a new focus of private foundations on PRIs to achieve the same results.

What is a PRI?

A PRI is an investment, rather than a grant, whose primary purpose is to achieve one or more of the private foundation’s tax exempt purposes and no significant purposes of which is the production of income or the appreciation of property. However, the fact that an investment produces significant income or capital appreciation is not conclusive evidence that income or appreciation was a significant purpose of the investment, and, therefore, does not preclude the investment from being a valid PRI. As a practical matter, many PRIs produce income or capital appreciation. The test is whether the production of income or capital appreciation is a significant purpose of the investment over the tax exempt purposes of the investment. As long as the tax exempt purpose of the investment is strong, the production of income or capital appreciation should be viewed as a mere ancillary benefit.

A PRI is also a great benefit to a private foundation. PRI counts towards a foundation’s qualifying distributions just as if they were grants and are exempt from the excess business holdings tax (imposed on foundation investments that exceed 20 percent of a for-profit venture) and the jeopardizing investment tax (imposed on investments that jeopardize the tax exempt purposes of a foundation). (more…)


Useful Resource for Private Foundations

Foundation Source has developed a 15-question assessment tool to help private foundations identify activities that could increase the foundation’s exposure to risk.  This useful resource may be accessed by clicking here.


Proposed Regulations Regarding Foreign Grants

When a private foundation makes a grant to a foreign organization, special rules apply.   For example, grants for charitable purposes to foreign organizations generally may be treated as a qualifying distribution and not a taxable expenditure if the private foundation makes a good faith determination that the foreign organization is the equivalent of a public charity.  Currently,  a determination is considered as made in good faith if it is based on an affidavit of the foreign organization or an opinion of counsel.  The proposed regulations modify this rule to identify a broader class of tax practitioners upon whose written advice a private foundation may base a good faith determination to include a ”qualified tax practitioner”; defined as an attorney, a certified public accountant (“CPA”), or an enrolled agent.


IRS Releases Examples of Program-Related Investments

The IRS released proposed regulations under Section 4944 providing additional examples of program related investments (PRIs) (PRIs are excepted from the jeopardizing investment rules).  The proposed regulations add nine new examples intended to illustrate that a wider range of investments qualify as PRIs than the range currently presented in Treas. Reg. § 53.4944-3(b). The proposed regulations do not modify the existing regulations; rather, they provide additional examples that illustrate the application of the existing regulations.  Generally, the charitable activities illustrated in the new examples are based on published guidance and on financial structures described in private letter rulings. (more…)


Revised 990 Regulations

Until recently, when an organization sought public charity status on its Form 1023 and received a favorable determination letter from the Internal Revenue Service recognizing it as exempt under Section 501(c)(3) of the Code, its public charity status (if granted) would be for a five-year “advance ruling period”. After this advance ruling period, the organization would make a separate filing to the IRS to establish public charity status based on satisfaction of one of the Support Tests. On September 7, 2011, final regulations were issued that change the timing and process of determining public charity status.  A brief description of the changes can be read here.


Dissolution of Private Foundations

Many 501(c)(3) organizations are finding it necessary to cease operations by dissolving or merging out of existence. In order to effectuate such, 501(c)(3) public charities only need to follow the state law requirements (such as filing articles of dissolution), distribute assets consistent with their organizational documents and file a final IRS Form 990.

But a private foundation that desires to cease operations, in addition to following the steps noted above for public chairites, must also take (more…)


Building Family Philanthropy Through Private Foundations

I’ve noticed a trend in our estate planning practice — an increasing interest in establishing private non-operating foundations. This is interesting given the advantage that donor-advised funds provide over foundations, most notably the reduced administrative burdens on a family who opt for donor-advised funds over foundations. There are also extremely well run donor-advised funds to pick from, funds with great track records and high customer satisfaction ratings. So what is the reasoning? I think it stems from a desire of a parent to teach philanthropy to their children, grandchildren, and possibly great-grandchildren. Family members are typically on the board of directors of the foundation so they are forced to come together and make decisions about how grants are made. The hope is having family members convening in one place and spending time discussing charitable gifts will provide a springboard for other charitable giving. Even though the foundation document typically provides family members with fairly easily methods of terminating the foundation, at least a vehicle is in place for family philanthropy that can last generations.


IRS Grants Foundation Additional 5 Years to Dispose of Excess Business Holdings

The excess business holdings rules (IRC Section 4943) limit the stock a private foundation may hold to 20 percent of a corporation’s voting stock less stock held by its disqualified persons (including trustees, directors, officers, and their family members).  A special rule gives a private foundation five years to dispose of any stock that constitutes an excess business holding if it was acquired by gift.  In light of the current economy, private foundations may find it difficult to dispose of excess business holdings within this five year period without selling for a substantial discount.  

Fortunately, an additional five years may be granted if (1) the foundation made diligent efforts to dispose of the stock, (2) disposition within the initial 5-year period has not been possible, except at a price substantially below fair market value, by reason of such size and complexity or diversity of such holdings, (3) prior to the expiration of the initial 5-year period, the private foundation submits to the IRS and relevant Attorney General a plan for disposing of all of the excess business holdings involved in the extension, and (4) the IRS determines that such plan can reasonably be expected to be carried out before the close of the extension period.  In Priv. Ltr. Rul. 201028044, the IRS granted a 5-year extension to a private foundation where the value of its stock had declined by more than 50% and the timing of the foundation’s disposition was affected by federal securities laws.  In light of the stock market decline, numerous private foundations may currently be in a similar position.  Private foundations faced with the pending deadline to reduce its excess business holdings should expl0re prior to the expiration of the initial 5-year period whether an additional 5-year extension may be available.


Disaster Relief Programs for Company Foundations

A corporate sponsored charitable organization may conduct disaster relief and emergency hardship assistance programs for the benefit of its sponsoring corporation’s employees. With respect to a corporate sponsored “private foundation” (e.g., where the charitable organization receives substantially all of its support from the corporation), relief may be provided to employees who are victims of any Presidentially declared disaster, which may include an earthquake, flood, hurricane, or tornado. With respect to a corporate sponsored “public charity” (e.g., where the charitable organization receives support from the corporation and employees), relief may be provided to employees who are victims of any Presidentially declared disaster or any emergency hardship resulting from a severe personal crisis, such as a fire, accident, illness, death, or crime.

Relief must be provided based on an objective determination of need and the selection committee should be comprised of individuals who are not in a position to exercise substantial influence over the sponsoring corporation. In addition, the disaster relief and emergency hardship assistance programs cannot be used by the sponsoring corporation to recruit or induce employment or otherwise satisfy an obligation to provide employee benefits. See IRS Publication 3833, Disaster Relief, for additional discussion regarding disaster relief and emergency hardship programs. If the requirements are satisfied, donors who contribute to the charitable organization are entitled to an income tax deduction and the relief payment is not treated as taxable compensation to the employee. 


Artists Seeking Grants – The Laws That Govern Givers

As government funding of private arts and education shrinks, grants from private foundations become more competitive.  There are many legal factors that affect foundations’ decisions to give away money. The laws can be very complex, but the following primer can help artists direct their energies when choosing foundations and crafting their applications:  Team Publication (Artists Seeking Grants – The Laws that Govern the Givers of the Grant).

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