If a private foundation makes any investments that would financially jeopardize the carrying out of its exempt purposes, both the foundation and the individual foundation managers may become liable for taxes on these jeopardizing investments under §4944.
Initial tax. An excise tax of 5% of the amount involved (the jeopardizing investment) is imposed on the foundation for each tax year, or part of a year, in the taxable period. The foundation will not be liable for the tax if it can show that the jeopardizing investment was due to reasonable
cause and not willful neglect, and that the jeopardizing investment was corrected within the correction period.
An excise tax of 5% of the amount involved is also imposed on any foundation manager who knowingly, willfully , and without reasonable cause participated in making the jeopardizing investment.
This tax applies to investments of either income or principal.
Additional tax. If a private foundation is liable for the initial tax and has not removed the investment from jeopardy within the taxable period, an additional excise tax of 25% of the amount involved will be imposed on the foundation. The additional tax will not be assessed, or if assessed
will be abated, if the investment is removed from jeopardy within the correction period .
In each case where this additional tax is imposed on the foundation, an additional excise tax of 5% of the amount involved is imposed on any foundation manager who refuses to agree to all or part of the removal from jeopardy within the correction period.
If more than one individual manager is liable for the excise tax on jeopardizing investments, all parties will be jointly and severally liable.
Limits on liability for management. For any one jeopardizing investment, the maximum initial tax that may be imposed is $5,000, and the maximum additional tax is $10,000.
PROGRAM-RELATED INVESTMENTS are those in which:
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.
If an investment incidentally produces significant income or capital appreciation, this is not, in the absence of other factors, conclusive evidence that a: significant purpose is the production of income or the appreciation of property.
The investments, to be program related, must significantly further the foundation's exempt activities. They must be investments that would not have been made except for their relationship to the exempt purposes. The investments include those made in functionally related activities that are carried
on within a larger combination of similar activities related to the exempt purposes.
Examples. The following are some typical examples of program-related investments:
Low-interest or interest-free loans to needy students,
High-risk investments in nonprofit low-income housing projects,
Low-interest loans to small businesses owned by members of economically disadvantaged groups, where commercial funds at reasonable interest rates are not readily available,
Investments in businesses in deteriorated urban areas under a plan to improve the economy of the area by providing employment or training for unemployed residents, and
Investments in nonprofit organizations combating community deterioration.
Investment changes. If a foundation changes the form or terms of an investment, and if the investment no longer qualifies as program-related, it then must be determined whether or not the investment jeopardizes carrying out its exempt purposes.
Once an investment is determined to be program-related, it will continue to qualify as a program-related investment if changes in the form or terms of the investment are made primarily for exempt purposes and not for any significant purpose involving the production of income or the appreciation
of property. A change made in the form or terms of a program-related investment for the prudent protection of the foundation's investment will not ordinarily cause the investment to cease to qualify as program-related. Under certain conditions a program-related investment may cease to be program-related
because of a critical change in circumstances, such as serving an illegal purpose or serving the private purpose of the foundation or its managers.
An investment that ceases to be program-related because of a critical change in circumstances does not subject the foundation making the investment to the tax on jeopardizing investments before the 30th day after the date on which the foundation (or any of its managers) has actual knowledge of
the critical change in circumstances.
[Source: Internal Revenue Service, U.S. Dept. Of Treasury (IRS), http://www.irs.gov/]
