Final regulations adopt examples of private foundation program-related investments

Private foundation program-related investments

The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9762) providing guidance to private foundations on program-related investments.

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The final regulations (T.D. 9762 [PDF 253 KB]) adopt, with modifications, proposed regulations released in April 2012 that provided examples illustrating investments that qualify as program-related investments. Notably, several examples contained in the proposed regulations were amended to reflect comments received.


Section 4944 imposes excise taxes on a private foundation that makes an investment that jeopardizes the foundation’s ability to carry out its exempt purposes.

An excise tax also is imposed on any foundation manager who knowingly participates in the foundation’s making of a “jeopardizing investment.” Program-related investments are excepted from treatment as jeopardizing investments. 

In addition, other provisions of the private foundation excise tax regime accord special treatment to program-related investments. For example:

  • Under section 4942, program-related investments are excluded from the assets taken into account when determining a private foundation’s minimum distribution requirement and are treated as qualifying distributions for purposes of meeting the minimum distribution requirement. 
  • Under section 4943, program-related investments are excluded from the excess business holdings restrictions. 
  • Under section 4945, program-related investments generally are not taxable expenditures, provided the private foundation exercises expenditure responsibility when required to do so. 

The regulations under section 4944 define a “program-related investment” as an investment: (1) the primary purpose of which is to accomplish purposes in section 170(c)(2)(B) (generally, the same as exempt purposes in section 501(c)(3)); (2) no significant purpose of which is the production of income or the appreciation of property; and (3) no purpose of which is to accomplish certain prohibited purposes (e.g., legislative lobbying or political campaign activities). 

Final regulations

The final regulations do not change the definition of a program-related investment, but contain nine examples that illustrate additional types of investments that qualify as program-related investments. The final regulations, like the proposed regulations, illustrate the following principles:

  • An activity conducted in a foreign country furthers an exempt purpose if the same activity would further an exempt purpose if conducted in the United States.
  • 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 a 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 organizations, and equity investments in for-profit organizations.
  • A credit enhancement arrangement may qualify as a program-related investment.
  • A private foundation’s acceptance of an equity position in conjunction with making a loan does not necessarily prevent the investment from qualifying as a program-related investment.

Incorporation of comments

The final regulations amended several of the examples included in the proposed regulations to reflect comments received. One example was amended to clarify that a subsidiary of a drug company that sells a vaccine to poor individuals at a price that is affordable to the affected population can also sell the vaccine to those who can afford it at fair market value prices. Another example was revised to clarify that making loans bearing interest below the market rate to poor individuals living in a developing country is a program-related investment, regardless of whether a natural disaster has recently occurred in the developing country. 

The final regulations did not incorporate a comment requesting that a certain example be revised to illustrate an equity investment in an LLC treated as a partnership for federal tax purposes, instead of a loan to the LLC. The Treasury Department and IRS noted that an equity investment by a section 501(c)(3) organization in an entity treated as a partnership for federal tax purposes raises a host of issues related to the continuing exemption of the exempt partner and the activities of the partnership that are difficult to summarize in examples in regulations, and that the IRS is considering whether to address program-related investments in the form of investments in partnerships through the issuance of a revenue ruling. 

T.D. 9762 will be published in the Federal Register on April 25, 2016.


For more information, contact the Managing Director-in-Charge of KPMG's Washington National Tax Exempt Organizations Tax group:

D. Greg Goller |  +1 (703) 286- 8391 |

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