New IRS Guidance on Mission-Related Investments

9/16/2015 Articles

Recent guidance on mission-related investing should give comfort to private foundations that seek to hold their capital in assets consistent with their charitable purpose.  Notice 2015-62, released by the Internal Revenue Service on September 15, 2015, provides little new information, but does reassure the philanthropic community that an investment with a lower than market return will not necessarily be treated as a jeopardizing investment so long as the foundation managers exercised ordinary business care and prudence in their investigation before making the investment. 

The Notice states that if an investment meets all the criteria of a program-related investment except that a significant purpose of the investment is the production of income or the appreciation of property, it will not be viewed as a jeopardizing investment simply because it is expected to generate a return.  The directors must still exercise business care and judgment in selecting the investment:

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 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.

The Notice doesn’t add anything to the rules and regulations that determine whether an investment meets the requirements of a program-related investment.  The fundamental requirements for an investment to qualify as a program-related investment are the following:

  • The primary purpose is to accomplish one or more of the foundation's exempt purposes,
  • Production of income or appreciation of property is not a significant purpose, and
  • Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose.

In determining whether a significant purpose of an investment is the production of income or the appreciation of property, it is relevant whether investors who engage in investments only for profit would be likely to make the investment on the same terms as the private foundation.

The IRS website has a helpful summary of the rules, and some useful examples are contained in Proposed Regulations published in 2012.  Foundations should also, of course, be sure that any investment strategy is consistent with its governance documents (Articles of Incorporation or Trust Agreement) and any applicable gift instruments.