Dec 7

Written by: Casey S. Hale
12/7/2012 9:42 AM  RssIcon


2012 has been a significant year for Program Related Investments ("PRI") and even the White House is getting in on the act. The main reason this year has been so significant is that for the first time since 1972, the Internal Revenue Service is preparing to promulgate a new set of modernized PRI examples that it will tack onto the existing PRI examples in the Treasury Regulations.

PRIs are loans or capital investments made by a private foundation to further the private foundation's charitable purposes and not with the primary purpose of producing income or capital gains. And a PRI counts toward a private foundation's annual 5% distribution requirement.

While PRIs have been permissible under the Internal Revenue Code and supporting Treasury Regulations for more than 40 years now, their use by private foundations has lagged. Many point to outdated, less-than-clear Treasury Regulations as the reason private foundations have largely avoided PRIs. Although some in the private foundation community aren't even aware PRIs exist as a charitable tool, those that are aware have been slow to use PRIs without first obtaining a private letter ruling from the IRS or an opinion letter from counsel.

Private foundations typically satisfy their annual 5% distribution requirements by making grants. During the past several years, private foundations have found it more difficult to meet their 5% distribution requirement and simultaneously grow their endowments. That's because the annual required grant amount is 100% loss on a private foundation's balance sheet of 5% of the private foundation's assets. A foundation's endowment shrinks each year it's investment returns don't outpace 5%. On the other hand, a PRI offers a private foundation an opportunity to make a charitable distribution that counts toward the 5% annual requirement but at the same time has the potential to produce a return. And a PRI remains as an asset on a private foundation's balance sheet.

Fortunately, interest in PRIs has been growing over the past several years. The IRS is preparing to promulgate a new set of modernized examples that they will tack onto the existing PRI Treasury Regulations. Those new examples are intended to bring the PRI Treasury Regulations up to date and, hopefully, make it easier for private foundations to engage in PRIs.

Earlier this year, I gave several presentations on PRIs. A pdf of that presenation can be found here.


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