n-15-62.pdf

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Investments Made for Charitable Purposes

Notice 2015-62

# SECTION 1. PURPOSE

This notice provides guidance on the application of section 4944 of the Internal
Revenue Code (Code) to investments that are made by private foundations for
purposes described in section 170(c)(2)(B), but are not program-related investments
(PRIs) as defined in section 4944(c) and the regulations thereunder.

## SECTION 2. BACKGROUND

Section 4944(a)(1) imposes an excise tax on a private foundation that invests
"any amount in such a manner as to jeopardize the carrying out of any of its exempt
purposes." In addition, section 4944(a)(2) imposes an excise tax on the participation of
any foundation manager in the making of such an investment, knowing that the
investment will jeopardize the carrying out of any of the foundation's exempt purposes.

Section 53.4944-1(a)(2)(i) of the Excise Tax Regulations provides that an
investment jeopardizes the carrying out of the exempt purposes of a private foundation
if it is determined that the foundation managers, in making such investment, failed to
exercise ordinary business care and prudence (under the circumstances prevailing at
the time of making the investment) in providing for the long-term and short-term
financial needs of the foundation to carry out its exempt purposes. 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

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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). Further, the determination
of whether an investment jeopardizes the carrying out of the foundation's exempt
purposes is made on an investment-by-investment basis, in each case taking into
account the foundation's entire portfolio. Investments that are considered "high risk"
may be closely scrutinized to determine whether the foundation managers have met the
requisite standard of care. However, once an investment has been determined not to
jeopardize the carrying out of the foundation's exempt purposes, the investment will not
later be considered a jeopardizing investment, even if the foundation subsequently
realizes a loss as a result of the investment.

Section 4944(c) provides an exception for PRIs, which are defined as
"investments, the primary purpose of which is to accomplish one or more of the
purposes described in section 170(c)(2)(B), and no significant purpose of which is the
production of income or the appreciation of property." Section 170(c)(2)(B) defines the
"charitable purposes" of organizations (including private foundations) that are eligible to
receive contributions that are deductible by the donor for federal income tax purposes.
The regulations under section 4944 provide additional guidance regarding what it
means for purposes of section 4944 for an investment to be made primarily to
accomplish one or more of the purposes described in section 170(c)(2)(B) and whether
a significant purpose of the investment is the production of income or the appreciation of
property.

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Questions have arisen about whether an investment made by a private
foundation that furthers its charitable purposes, but is not a PRI because a significant
purpose of the investment is the production of income or the appreciation of property, is
subject to tax under section 4944.

### SECTION 3. DISCUSSION

Only a jeopardizing investment is subject to tax under section 4944. Under the
regulations, an investment made by a private foundation will not be considered to be a
jeopardizing investment if, in making the investment, the foundation managers exercise
ordinary business care and prudence (under the circumstances prevailing at the time
the investment is made) in providing for the long-term and short-term financial needs of
the foundation to carry out its charitable purposes. Although the regulations list some
factors that managers generally consider when making investment decisions, the
regulations do not provide an exhaustive list of facts and circumstances that may
properly be considered. When exercising ordinary business care and prudence in
deciding whether to make an investment, foundation managers may consider all
relevant facts and circumstances, including the relationship between a particular
investment and the foundation's charitable purposes. Foundation managers are not
required to select only investments that offer the highest rates of return, the lowest risks,
or the greatest liquidity so long as the foundation managers exercise the requisite
ordinary business care and prudence under the facts and circumstances prevailing at
the time of the investment in making investment decisions that support, and do not
jeopardize, the furtherance of the private foundation's charitable purposes. For
example, a private foundation will not be subject to tax under section 4944 if foundation

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managers who have exercised ordinary business care and prudence make an
investment that furthers the foundation's charitable purposes at an expected rate of
return that is less than what the foundation might obtain from an investment that is
unrelated to its charitable purposes.

This standard is consistent with investment standards under state laws, which
generally provide for the consideration of the charitable purposes of an organization or
certain factors, including an asset's special relationship or special value, if any, to the
charitable purposes of the organization, in properly managing and investing the
organization's investment assets. See, e.g., Unif. Prudent Mgmt. of Institutional Funds
Act. §§ 3(a), 3(e)(1)(H) and accompanying comments, 7A pt. III U.L.A. 21-22 (Pocket
Pt. 2015).

#### SECTION 4. DRAFTING INFORMATION

The principal author of this notice is Peter A. Holiat of the Office of the Associate
Chief Counsel (TEGE). For further information regarding this notice contact Mr. Holiat
at 202-317-5800 (not a toll-free call).