In April 2016, the IRS issued final regulations that provide guidance to private foundations (PFs) on program-related investments (PRIs).
A much-needed and anticipated notice of proposed rulemaking relating to PRIs was published in April 2012 in the Federal Register (77 FR 23429). This notice added nine additional proposed examples to Section 53.4944-3(b) that make the process of investing easier for the tax-exempt sector. These examples demonstrated that PRIs may:
- Accomplish a variety of exempt purposes
- Fund activities in one or more foreign countries
- Earn a high potential rate of return
- Take the form of an equity position in conjunction with making a loan as well as other provisions for qualifying as a PRI
The IRS received 15 comments from the public. After consideration, the proposed regulations were adopted as amended by this Treasury decision.
Here’s an overview of just two of the amended examples:
- Example 11. This involved a PF’s investment in a subsidiary of a drug company for development of a vaccine to help prevent disease that predominantly affects poor individuals in developing countries. The amendment clarified that the subsidiary can also sell the vaccine to those who can afford it at fair market value prices in addition to the requirement to distribute to the affected population at a price that’s affordable to the affected population. This was deemed appropriate because the primary purpose of the investment is to fund scientific research in the public interest.
- Example 15. This involved loans by a PF to poor individuals living in a developing country where a natural disaster had occurred. The loans enabled them to become self-sufficient by starting a small business. The primary purpose of the loans were to provide relief to the poor and distressed, which qualifies them as a PRI. This example was amended to eliminate the natural disaster reference because loans to poor persons, regardless of the occurrence of a natural disaster, qualify as a PRI.
While some examples weren’t changed within the final regulations, the examples do provide discussion on the comments provided to the IRS and why the agency felt clarification wasn’t necessary. The IRS intends to post the principles illustrated in the examples on its Web site but not within the final regulations.
The Treasury Department and the IRS are also considering whether to address PRIs in the form of investments in partnership interests through the issuance of a revenue ruling.
We're Here to Help
The final regulations provide guidance that may be helpful if you’re considering making PRIs or want to explore more complex forms of PRIs. Contact your Moss Adams professional for more information.