Program-Related Investments (The Basics)
By the Venn Foundation reposted with permission.
Program-Related Investments (PRIs) are investments that private foundations and public charities can make to advance their charitable missions.
What are the requirements for a PRI?
For a particular investment to qualify as a PRI, it has to meet three requirements:
The primary purpose of the investment is to accomplish one or more of the organization's exempt purpose
No significant purpose of the investment is the production of income or the appreciation of property is not a significant purpose of the investment
No purpose of the investment is to influence legislation or to participate or intervene in a political campaign on behalf of or in opposition to a candidate for public office
How long have PRIs been available to private foundations?
PRIs were created as part of the Tax Reform Act of 1969, which changed the regulatory landscape for private foundations in a number of important ways. As part of that act, private foundations can be fined for making "jeopardizing investments", which is any investment that puts at risk the foundation's ability to carry out its exempt purposes. Because they are made for a charitable purpose, PRIs are exempt from these jeopardizing investment rules.
What is "expenditure responsibility"?
When a private foundation makes a PRI (or a grant) to an entity that is not designated as "tax-exempt" by the IRS (like a business), the foundation must accept what is called "expenditure responsibility."
Practically speaking, this means the foundation must...
Ensure that the purpose of the PRI is charitable
Conduct basic due diligence on the receiving organization
Receive certain written commitments from the receiving organization
Receive regular reports from the receiving organization, especially on use of PRI funds
Report on the PRI to the IRS annually on form 990-PF
Take action against the receiving organization if anything goes wrong.
What are the consequences if the foundation does not meet its "expenditure responsibility"?
If the IRS determines that the foundation did not meet its expenditure responsibility, then the IRS may treat the PRI as a "Taxable Expenditure." This means the foundation itself must pay a fine equal to 20% of the PRI amount. Additionally, foundation managers and board members can be individually and separately liable for a fine to 5% of the PRI not to exceed $10,000. If corrective actions are not taken within a specified time, additional fines can be imposed.
Can other types of nonprofit exempt organizations make PRIs?
Technically, the term "Program-Related Investment" is defined legally in relation to private foundations. However, public charities, community foundations (which are often classified as public charities), and other tax-exempt entities also use the term "program-related investment" to refer to an investment made primarily to advance a charitable purpose, and IRS Form 990 also uses this terminology. Public charities and other types of exempt organizations that make charitable investments usually follow the same guidelines that private foundations do, but the potential penalties for mistakes are less severe.
How does a foundation ensure a PRI has a charitable purpose?
Ensuring that a particular PRI is being made to promote a charitable purpose is one of the most important first steps of expenditure responsibility. Unfortunately, it is not always clear and usually involves engaging an attorney to research. Often the result of the attorney's inquiry is not conclusive either way, which means that the foundation must consider the risks and make a decision with imperfect information.
What is a legal opinion letter and why do some foundations get them?
Because the IRS can levy fines against foundations and managers for improper PRIs, some foundations ask an attorney to write a legal opinion letter saying that they believe the investment classifies as a PRI. Having this legal opinion usually allows the foundation's managers to avoid penalties, since it helps show that they acted in good faith and fulfilled their fiduciary duties. The problem is that attaining a legal opinion letter is expensive and takes time.
What is a private letter ruling and why do some foundations get them?
Before entering into a contemplated transaction, a taxpayer can request a Private Letter Ruling (PLR) from the IRS, which lets the taxpayer know how the IRS would treat that transaction given the details provided. Foundations sometimes request PLRs from the IRS before making a PRI, but it is not a requirement. PLRs become public documents, but importantly they cannot be relied upon by others contemplating similar transactions with different facts. PLRs are often cost prohibitive, and they can take a long time to receive.
Additional resources found here.