Examples of Program-Related Investments, 23429-23432 [2012-9468]
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Federal Register / Vol. 77, No. 76 / Thursday, April 19, 2012 / Proposed Rules
Dated: April 6, 2012.
Daniel J. Basta,
Director for the Office of National Marine
Sanctuaries.
Dated: April 3, 2012.
Cynthia K. Dohner,
Regional Director, Fish and Wildlife Service.
[FR Doc. 2012–9345 Filed 4–18–12; 8:45 am]
BILLING CODE 3510–NK–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 53
[REG–144267–11]
RIN 1545–BK76
Examples of Program-Related
Investments
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
This document contains
proposed regulations that provide
guidance to private foundations on
program-related investments. These
proposed regulations provide a series of
new examples illustrating investments
that qualify as program-related
investments. In addition to private
foundations, these proposed regulations
affect foundation managers who
participate in the making of programrelated investments.
DATES: Comments and requests for a
public hearing must be received by July
18, 2012.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–144267–11), room
5205, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–144267–
11), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically
via the Federal eRulemaking Portal at
https://www.regulations.gov/ (IRS REG–
144267–11).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Courtney D. Jones at (202) 622–6070;
concerning submissions of comments
and requests for a public hearing,
Oluwafunmilayo Taylor, (202) 622–7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
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SUMMARY:
Background
Section 4944(a) of the Internal
Revenue Code (Code) imposes an excise
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tax on a private foundation that makes
an investment that jeopardizes the
carrying out of any of the private
foundation’s exempt purposes (a
‘‘jeopardizing investment’’). Section
4944(a) also imposes an excise tax on
foundation managers who knowingly
participate in the making of a
jeopardizing investment. Section
4944(b) imposes additional excise taxes
on private foundations and foundation
managers when investments are not
timely removed from jeopardy.
Generally, under § 53.4944–1(a)(2), a
jeopardizing investment occurs when,
based on the facts and circumstances at
the time the investment is made,
foundation managers fail to exercise
ordinary business care and prudence in
providing for the long- and short-term
financial needs of the foundation. The
determination of whether an investment
is a jeopardizing investment is made on
an investment-by-investment basis,
taking into account the private
foundation’s entire portfolio. In
exercising the requisite standard of care
and prudence, foundation managers
may take into account the expected
investment return, price volatility, and
the need for portfolio diversification.
Section 4944(c) excepts programrelated investments (‘‘PRIs’’) from
treatment as jeopardizing investments.
The regulations under section 4944(c)
define a PRI as an investment: (1) The
primary purpose of which is to
accomplish one or more of the purposes
described in section 170(c)(2)(B); (2) no
significant purpose of which is the
production of income or the
appreciation of property; and (3) no
purpose of which is to accomplish one
or more of the purposes described in
section 170(c)(2)(D) (attempting to
influence legislation or participating in
or intervening in any political
campaign).
An investment is made primarily to
accomplish one or more of the purposes
described in section 170(c)(2)(B)
(referred to as ‘‘charitable purposes’’) if
it significantly furthers the
accomplishment of the private
foundation’s exempt activities and
would not have been made but for the
relationship between the investment
and the accomplishment of those
exempt activities. In determining
whether a significant purpose of an
investment is the production of income
or the appreciation of property,
§ 53.4944–3(a)(2)(iii) provides that it
shall be relevant whether investors who
are engaged in the investment solely for
the production of income would be
likely to make the investment on the
same terms as the private foundation.
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The regulations under other Code
sections in Chapter 42 accord special
tax treatment to PRIs. For example,
§ 53.4942(a)–2(c)(3)(ii)(d) excludes PRIs
from the assets a private foundation
takes into account when determining
how much it must distribute under
section 4942 as a ‘‘distributable
amount’’ for the taxable year. In
addition, § 53.4942(a)–3(a)(2)(i)
generally includes distributions that
qualify as PRIs as ‘‘qualifying
distributions’’ for purposes of meeting
the distribution requirements under
section 4942. Section 53.4943–10(b)
excludes PRIs from being treated as
business holdings for the purpose of
calculating excess business holdings
subject to excise tax under section 4943.
Sections 53.4945–5(b)(4) and 53.4945–
6(c)(1)(i) also make clear that PRIs will
not constitute taxable expenditures
under section 4945, provided the
private foundation exercises
‘‘expenditure responsibility’’ in
circumstances in which it is required to
do so. Among other expenditure
responsibility requirements, a private
foundation must require a written
commitment from the recipient of the
PRI that the funds received will be used
only for the purposes of the programrelated investment. As noted, the
primary purpose of a program-related
investment must be the accomplishment
of a charitable purpose.
Section 53.4944–3(b) contains nine
examples illustrating investments that
qualify as PRIs and one example of an
investment that does not qualify as a
PRI. The existing examples focus on
domestic situations principally
involving economically disadvantaged
individuals and deteriorated urban
areas.
The Treasury Department and the IRS
are aware that the private foundation
community would find it helpful if the
regulations could include additional PRI
examples that reflect current investment
practices and illustrate certain
principles, including that: (1) An
activity conducted in a foreign country
furthers a charitable purpose if the same
activity would further a charitable
purpose if conducted in the United
States; (2) the charitable purposes
served by a PRI are not limited to
situations involving economically
disadvantaged individuals and
deteriorated urban areas; (3) the
recipients of PRIs need not be within a
charitable class if they are the
instruments for furthering a charitable
purpose; (4) a potentially high rate of
return does not automatically prevent
an investment from qualifying as
program-related; (5) PRIs can be
achieved through a variety of
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Federal Register / Vol. 77, No. 76 / Thursday, April 19, 2012 / Proposed Rules
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investments, including loans to
individuals, tax-exempt organizations
and for-profit organizations, and equity
investments in for-profit organizations;
(6) a credit enhancement arrangement
may qualify as a PRI; and (7) a private
foundation’s acceptance of an equity
position in conjunction with making a
loan does not necessarily prevent the
investment from qualifying as a PRI.
Finally, the proposed regulations
include examples illustrating that loans
and capital may be provided to
individuals or entities that are not
within a charitable class themselves, if
the recipients are the instruments
through which the private foundation
accomplishes its exempt activities.
Treasury Department and the IRS
participated in their development.
Proposed Effective/Applicability Date
Explanation of Provisions
The proposed regulations add nine
new examples that illustrate that a
wider range of investments qualify as
PRIs than the range currently presented
in § 53.4944–3(b). The proposed
regulations do not modify the existing
regulations; rather, they provide
additional examples that illustrate the
application of the existing regulations.
Generally, the charitable activities
illustrated in the new examples are
based on published guidance and on
financial structures described in private
letter rulings.
The new examples demonstrate that a
PRI may accomplish a variety of
charitable purposes, such as advancing
science, combating environmental
deterioration, and promoting the arts.
Several examples also demonstrate that
an investment that funds activities in
one or more foreign countries, including
investments that alleviate the impact of
a natural disaster or that fund
educational programs for poor
individuals, may further the
accomplishment of charitable purposes
and qualify as a PRI. One example
illustrates that the existence of a high
potential rate of return on an investment
does not, by itself, prevent the
investment from qualifying as a PRI.
Another example illustrates that a
private foundation’s acceptance of an
equity position in conjunction with
making a loan does not necessarily
prevent the investment from qualifying
as a PRI, and two examples illustrate
that a private foundation’s provision of
credit enhancement can qualify as a PRI.
The last example demonstrates that a
guarantee arrangement may qualify as a
PRI. The proposed regulations address
solely the impact of section 4944 on the
facts described and do not address
whether there is a qualifying
distribution under section 4942.
However, the Treasury Department and
the IRS conclude that, based on the facts
described in the last example, there
would be no qualifying distribution
under section 4942 at the time the
foundation enters into the guarantee
arrangement. Under certain
circumstances, a private foundation may
treat payments made under a guarantee
arrangement as qualifying distributions.
Paragraph (b), Examples 11 through
19 of this section will be effective on the
date of publication of the Treasury
decision adopting these examples as
final regulations in the Federal Register.
Taxpayers may rely on paragraph (b),
Examples 11 through 19 of this section
before these proposed regulations are
finalized.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 53 is
proposed to be amended as follows:
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List of Subjects in 26 CFR Part 53
Excise taxes, Foundations,
Investments, Lobbying, Reporting and
recordkeeping requirements, Trusts and
trustees.
PART 53—FOUNDATION AND SIMILAR
EXCISE TAXES
Paragraph. 1. The authority citation
for part 53 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866, as
supplemented by Executive Order
13563. Therefore, a regulatory
assessment is not required. It has also
been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to this
regulation, and because the regulation
does not impose a collection of
information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, this
regulation has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
comments that are submitted timely to
the IRS as prescribed in this preamble
under the ADDRESSES heading. The IRS
and the Treasury Department request
comments on all aspects of the proposed
rules. All comments will be available at
www.regulations.gov or upon request. A
public hearing will be scheduled if
requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of
the date, time, and place for the public
hearing will be published in the Federal
Register.
Drafting Information
The principal author of these
proposed regulations is Courtney D.
Jones, Office of the Chief Counsel (Tax
Exempt and Government Entities).
However, other personnel from the
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Par. 2. Section 53.4944–3 is amended
by adding Examples 11, 12, 13, 14, 15,
16, 17, 18, and 19 to paragraph (b) and
adding paragraph (c) to read as follows:
§ 53.4944–3 Exception for program-related
investments.
*
*
*
(b) * * *
*
*
Example 11. X is a business enterprise that
researches and develops new drugs. X’s
research demonstrates that a vaccine can be
developed within ten years to prevent a
disease that predominantly affects poor
individuals in developing countries.
However, neither X nor other commercial
enterprises like X will devote their resources
to develop the vaccine because the potential
return on investment is significantly less
than required by X or other commercial
enterprises to undertake a project to develop
new drugs. Y, a private foundation, enters
into an investment agreement with X in order
to induce X to develop the vaccine. Pursuant
to the investment agreement, Y purchases
shares of the common stock of S, a subsidiary
corporation that X establishes to research and
develop the vaccine. The agreement requires
S to distribute the vaccine to poor
individuals in developing countries at a price
that is affordable to the affected population.
The agreement also requires S to publish the
research results, disclosing substantially all
information about the results that would be
useful to the interested public. S agrees that
the publication of its research results will be
made as promptly after the completion of the
research as is reasonably possible without
jeopardizing S’s right to secure patents
necessary to protect its ownership or control
of the results of the research. The expected
rate of return on Y’s investment in S is less
than the expected market rate of return for an
investment of similar risk. Y’s primary
purpose in making the investment is to
advance science. No significant purpose of
the investment involves the production of
income or the appreciation of property. The
investment significantly furthers the
accomplishment of Y’s exempt activities and
would not have been made but for such
relationship between the investment and Y’s
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Federal Register / Vol. 77, No. 76 / Thursday, April 19, 2012 / Proposed Rules
exempt activities. Accordingly, the purchase
of the common stock of S is a programrelated investment.
Example 12. Q, a developing country,
produces a substantial amount of recyclable
solid waste materials that are currently
disposed of in landfills and by incineration,
contributing significantly to environmental
deterioration in Q. X is a new business
enterprise located in Q. X’s only activity will
be collecting recyclable solid waste materials
in Q and delivering those materials to
recycling centers that are inaccessible to a
majority of the population. If successful, the
recycling collection business would prevent
pollution in Q caused by the usual
disposition of solid waste materials. X has
obtained funding from only a few
commercial investors who are concerned
about the environmental impact of solid
waste disposal. Although X made substantial
efforts to procure additional funding, X has
not been able to obtain sufficient funding
because the expected rate of return is
significantly less than the acceptable rate of
return on an investment of this type. Because
X has been unable to attract additional
investors on the same terms as the initial
investors, Y, a private foundation, enters into
an investment agreement with X to purchase
shares of X’s common stock on the same
terms as X’s initial investors. Although there
is a high risk associated with the investment
in X, there is also the potential for a high rate
of return if X is successful in the recycling
business in Q. Y’s primary purpose in
making the investment is to combat
environmental deterioration. No significant
purpose of the investment involves the
production of income or the appreciation of
property. The investment significantly
furthers the accomplishment of Y’s exempt
activities and would not have been made but
for such relationship between the investment
and Y’s exempt activities. Accordingly, the
purchase of the common stock is a programrelated investment.
Example 13. Assume the facts as stated in
Example 12, except that X offers Y shares of
X’s common stock in order to induce Y to
make a below-market rate loan to X. X
previously made the same offer to a number
of commercial investors. These investors
were unwilling to provide loans to X on such
terms because the expected return on the
combined package of stock and debt was
below the expected market return for such an
investment based on the level of risk
involved, and they were also unwilling to
provide loans on other terms X considers
economically feasible. Y accepts the stock
and makes the loan on the same terms that
X offered to the commercial investors. Y
plans to liquidate its stock in X as soon as
the recycling collection business in Q is
profitable or it is established that the
business will never become profitable. Y’s
primary purpose in making the investment is
to combat environmental deterioration. No
significant purpose of the investment
involves the production of income or the
appreciation of property. The investment
significantly furthers the accomplishment of
Y’s exempt activities and would not have
been made but for such relationship between
the investment and Y’s exempt activities.
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Accordingly, the loan accompanied by the
acceptance of common stock is a programrelated investment.
Example 14. X is a business enterprise
located in V, a rural area in State Z. X
employs a large number of poor individuals
in V. A natural disaster occurs in V, causing
significant damage to the area. The business
operations of X are harmed because of
damage to X’s equipment and buildings. X
has insufficient funds to continue its
business operations and conventional
sources of funds are unwilling or unable to
provide loans to X on terms it considers
economically feasible. In order to enable X to
continue its business operations, Y, a private
foundation, makes a loan to X bearing
interest below the market rate for commercial
loans of comparable risk. Y’s primary
purpose in making the loan is to provide
relief to the poor and distressed. No
significant purpose of the loan involves the
production of income or the appreciation of
property. The loan significantly furthers the
accomplishment of Y’s exempt activities and
would not have been made but for such
relationship between the loan and Y’s
exempt activities. Accordingly, the loan is a
program-related investment.
Example 15. A natural disaster occurs in
W, a developing country, causing significant
damage to W’s infrastructure. Y, a private
foundation, makes loans bearing interest
below the market rate for commercial loans
of comparable risk to H and K, poor
individuals who live in W, to enable each of
them to start a small business. H will open
a roadside fruit stand. K will start a weaving
business. Conventional sources of funds were
unwilling or unable to provide loans to H or
K on terms they consider economically
feasible. Y’s primary purpose in making the
loans is to provide relief to the poor and
distressed. No significant purpose of the
loans involves the production of income or
the appreciation of property. The loans
significantly further the accomplishment of
Y’s exempt activities and would not have
been made but for such relationship between
the loans and Y’s exempt activities.
Accordingly, the loans to H and K are
program-related investments.
Example 16. X is a limited liability
company treated as a partnership for federal
income tax purposes. X purchases coffee
from poor farmers residing in a developing
country, either directly or through farmerowned cooperatives. To fund the provision of
efficient water management, crop cultivation,
pest management, and farm management
training to the poor farmers by X, Y, a private
foundation, makes a loan to X bearing
interest below the market rate for commercial
loans of comparable risk. The loan agreement
requires X to use the proceeds from the loan
to provide the training to the poor farmers.
X would not provide such training to the
poor farmers absent the loan. Y’s primary
purpose in making the loan is to educate
poor farmers about advanced agricultural
methods. No significant purpose of the loan
involves the production of income or the
appreciation of property. The loan
significantly furthers the accomplishment of
Y’s exempt activities and would not have
been made but for such relationship between
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the loan and Y’s exempt activities.
Accordingly, the loan is a program-related
investment.
Example 17. X is a social welfare
organization that is recognized as an
organization described in section 501(c)(4). X
was formed to develop and encourage
interest in painting, sculpture and other art
forms by, among other things, conducting
weekly community art exhibits. X needs to
purchase a large exhibition space to
accommodate the demand for exhibition
space within the community. Conventional
sources of funds are unwilling or unable to
provide funds to X on terms it considers
economically feasible. Y, a private
foundation, makes a loan to X at an interest
rate below the market rate for commercial
loans of comparable risk to fund the purchase
of the new space. Y’s primary purpose in
making the loan is to promote the arts. No
significant purpose of the loan involves the
production of income or the appreciation of
property. The loan significantly furthers the
accomplishment of Y’s exempt activities and
would not have been made but for such
relationship between the loan and Y’s
exempt activities. Accordingly, the loan is a
program-related investment.
Example 18. X is a non-profit corporation
that provides child care services in a lowincome neighborhood, enabling many
residents of the neighborhood to be gainfully
employed. X meets the requirements of
section 501(k) and is recognized as an
organization described in section 501(c)(3).
X’s current child care facility has reached
capacity and has a long waiting list. X has
determined that the demand for its services
warrants the construction of a new child care
facility in the same neighborhood. X is
unable to obtain a loan from conventional
sources of funds including B, a commercial
bank, because X lacks sufficient credit to
support the financing of a new facility.
Pursuant to a deposit agreement, Y, a private
foundation, deposits $h in B, and B lends an
identical amount to X to construct the new
child care facility. The deposit agreement
requires Y to keep $h on deposit with B
during the term of X’s loan and provides that
if X defaults on the loan, B may deduct the
amount of the default from the deposit. To
facilitate B’s access to the funds in the event
of default, the agreement requires that the
funds be invested in instruments that allow
B to access them readily. The deposit
agreement also provides that Y will earn
interest at a rate of t% on the deposit. The
t% rate is substantially less than Y could
otherwise earn on this sum of money, if Y
invested it elsewhere. The loan agreement
between B and X requires X to use the
proceeds from the loan to construct the new
child care facility. Y’s primary purpose in
making the deposit is to further its
educational purposes by enabling X to
provide child care services within the
meaning of section 501(k). No significant
purpose of the deposit involves the
production of income or the appreciation of
property. The deposit significantly furthers
the accomplishment of Y’s exempt activities
and would not have been made but for such
relationship between the deposit and Y’s
exempt activities. Accordingly, the deposit is
a program-related investment.
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Federal Register / Vol. 77, No. 76 / Thursday, April 19, 2012 / Proposed Rules
Example 19. Assume the same facts as
stated in Example 18, except that instead of
making a deposit of $h into B, Y enters into
a guarantee agreement with B. The guarantee
agreement provides that if X defaults on the
loan, Y will repay the balance due on the
loan to B. B was unwilling to make the loan
to X in the absence of Y’s guarantee. X must
use the proceeds from the loan to construct
the new child care facility. At the same time,
X and Y enter into a reimbursement
agreement whereby X agrees to reimburse Y
for any and all amounts paid to B under the
guarantee agreement. The signed guarantee
and reimbursement agreements together
constitute a ‘‘guarantee and reimbursement
arrangement.’’ Y’s primary purpose in
entering into the guarantee and
reimbursement arrangement is to further Y’s
educational purposes. No significant purpose
of the guarantee and reimbursement
arrangement involves the production of
income or the appreciation of property. The
guarantee and reimbursement arrangement
significantly furthers the accomplishment of
Y’s exempt activities and would not have
been made but for such relationship between
the guarantee and reimbursement
arrangement and Y’s exempt activities.
Accordingly, the guarantee and
reimbursement arrangement is a programrelated investment.
(c) Effective/applicability date.
Paragraph (b), Examples 11 through 19
of this section will be effective on the
date of publication of the Treasury
decision adopting these examples as
final regulations in the Federal Register.
Taxpayers may rely on paragraph (b),
Examples 11 through 19 of this section
before these proposed regulations are
finalized.
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Asbury, Iowa, 73 FR 50,297, and
terminates the proceeding.
FOR FURTHER INFORMATION CONTACT:
Deborah Dupont, Media Bureau, (202)
418–2180.
SUPPLEMENTARY INFORMATION: This is a
synopsis of the Commission’s Report
and Order, MB Docket No. 08–150,
adopted April 2, 2012, and released
April 2, 2012. The full text of this
Commission decision is available for
inspection and copying during normal
business hours in the FCC Information
Center, Portals II, 445 12th Street SW.,
Room CY–A257, Washington, DC 20554.
The complete text of this decision also
may be purchased from the
Commission’s duplicating contractor,
Best Copy and Printing, Inc., 445 12th
Street SW., Room CY–B402,
Washington, DC 20554, (800) 378–3160,
or via the company’s Web site,
www.bcpiweb.com. The Report and
Order is not subject to the Congressional
Review Act, and therefore the
Commission will not send a copy of it
in a report to be sent to Congress and
the Government Accountability Office,
see U.S.C. 801(a)(1)(A).
Federal Communications Commission.
Nazifa Sawez,
Assistant Chief, Audio Division, Media
Bureau.
[FR Doc. 2012–9401 Filed 4–18–12; 8:45 am]
BILLING CODE 6712–01–P
DEPARTMENT OF THE INTERIOR
Fish and Wildlife Service
50 CFR Part 17
[FR Doc. 2012–9468 Filed 4–18–12; 8:45 am]
[Docket No. FWS–R7–ES–2012–0009;
4500030113]
BILLING CODE 4830–01–P
RIN 1018–AY40
FEDERAL COMMUNICATIONS
COMMISSION
Endangered and Threatened Wildlife
and Plants; Special Rule for the Polar
Bear
47 CFR Part 73
[MB Docket No. 08–150; RM–11390; DA 12–
512]
Radio Broadcasting Services; Asbury
and Maquoketa, IA, and Mineral Point,
WI
Federal Communications
Commission.
ACTION: Proposed rule; dismissal.
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AGENCY:
The Audio Division dismisses
the petition for rule making filed by KM
Radio of Independence, LLC, proposing
the allotment of Channel 238A at
Mineral Point, Wisconsin, and the
substitution of reserved Channel *254A
for reserved vacant Channel *238A at
SUMMARY:
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Fish and Wildlife Service,
Interior.
ACTION: Proposed rule; availability of
draft environmental assessment.
AGENCY:
We, the U.S. Fish and
Wildlife Service (Service), propose to
amend the regulations at 50 CFR part
17, which implement the Endangered
Species Act of 1973, as amended (ESA),
to create a special rule under authority
of section 4(d) of the ESA that provides
measures that are necessary and
advisable to provide for the
conservation of the polar bear (Ursus
maritimus). The Secretary has the
discretion to prohibit by regulation with
SUMMARY:
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respect to the polar bear any act
prohibited by section 9(a)(1) of the ESA.
DATES: We will consider comments we
receive on or before June 18, 2012. We
must receive requests for public
hearings, in writing, at the address
shown in the FOR FURTHER INFORMATION
CONTACT section by June 4, 2012.
ADDRESSES:
Document availability: You can view
this proposed rule and the associated
draft environmental assessment on
https://www.regulations.gov under
Docket No. FWS–R7–ES–2012–0009.
Written comments: You may submit
comments on the proposed rule and
associated draft environmental
assessment by one of the following
methods:
• U.S. mail or hand-delivery: Public
Comments Processing, Attn: Docket No.
FWS–R7–ES–2012–0009; Division of
Policy and Directives Management; U.S.
Fish and Wildlife Service; 4401 N.
Fairfax Drive, MS 2042–PDM;
Arlington, VA 22203; or
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments to
Docket No. FWS–R7–ES–2012–0009.
Please indicate to which document,
the proposed rule or the draft
environmental assessment, your
comments apply. We will post all
comments on https://
www.regulations.gov. This generally
means that we will post any personal
information you provide us (see the
Public Comments section below for
more information).
FOR FURTHER INFORMATION CONTACT:
Charles Hamilton, Marine Mammals
Management Office, U.S. Fish and
Wildlife Service, Region 7, 1011 East
Tudor Road, Anchorage, AK 99503;
telephone 907–786–3309. Persons who
use a telecommunications device for the
deaf (TDD) may call the Federal
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SUPPLEMENTARY INFORMATION:
Executive Summary
Why We Need To Publish a Proposed
Rule
In response to litigation against the
Service challenging our December 16,
2008 final 4(d) special rule for the polar
bear, the District Court for the District
of Columbia (Court) found that although
the final 4(d) special rule for the polar
bear was consistent with the ESA, the
Service violated the National
Environmental Policy Act (NEPA) and
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when it promulgated the final 4(d)
E:\FR\FM\19APP1.SGM
19APP1
]]>Agencies
[Federal Register Volume 77, Number 76 (Thursday, April 19, 2012)]
[Proposed Rules]
[Pages 23429-23432]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-9468]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 53
[REG-144267-11]
RIN 1545-BK76
Examples of Program-Related Investments
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that provide
guidance to private foundations on program-related investments. These
proposed regulations provide a series of new examples illustrating
investments that qualify as program-related investments. In addition to
private foundations, these proposed regulations affect foundation
managers who participate in the making of program-related investments.
DATES: Comments and requests for a public hearing must be received by
July 18, 2012.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-144267-11), room
5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
144267-11), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically via the Federal
eRulemaking Portal at https://www.regulations.gov/ (IRS REG-144267-11).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Courtney D. Jones at (202) 622-6070; concerning submissions of comments
and requests for a public hearing, Oluwafunmilayo Taylor, (202) 622-
7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 4944(a) of the Internal Revenue Code (Code) imposes an
excise tax on a private foundation that makes an investment that
jeopardizes the carrying out of any of the private foundation's exempt
purposes (a ``jeopardizing investment''). Section 4944(a) also imposes
an excise tax on foundation managers who knowingly participate in the
making of a jeopardizing investment. Section 4944(b) imposes additional
excise taxes on private foundations and foundation managers when
investments are not timely removed from jeopardy.
Generally, under Sec. 53.4944-1(a)(2), a jeopardizing investment
occurs when, based on the facts and circumstances at the time the
investment is made, foundation managers fail to exercise ordinary
business care and prudence in providing for the long- and short-term
financial needs of the foundation. The determination of whether an
investment is a jeopardizing investment is made on an investment-by-
investment basis, taking into account the private foundation's entire
portfolio. In exercising the requisite standard of care and prudence,
foundation managers may take into account the expected investment
return, price volatility, and the need for portfolio diversification.
Section 4944(c) excepts program-related investments (``PRIs'') from
treatment as jeopardizing investments. The regulations under section
4944(c) define a PRI as an investment: (1) The primary purpose of which
is to accomplish one or more of the purposes described in section
170(c)(2)(B); (2) no significant purpose of which is the production of
income or the appreciation of property; and (3) no purpose of which is
to accomplish one or more of the purposes described in section
170(c)(2)(D) (attempting to influence legislation or participating in
or intervening in any political campaign).
An investment is made primarily to accomplish one or more of the
purposes described in section 170(c)(2)(B) (referred to as ``charitable
purposes'') if it significantly furthers the accomplishment of the
private foundation's exempt activities and would not have been made but
for the relationship between the investment and the accomplishment of
those exempt activities. In determining whether a significant purpose
of an investment is the production of income or the appreciation of
property, Sec. 53.4944-3(a)(2)(iii) provides that it shall be relevant
whether investors who are engaged in the investment solely for the
production of income would be likely to make the investment on the same
terms as the private foundation.
The regulations under other Code sections in Chapter 42 accord
special tax treatment to PRIs. For example, Sec. 53.4942(a)-
2(c)(3)(ii)(d) excludes PRIs from the assets a private foundation takes
into account when determining how much it must distribute under section
4942 as a ``distributable amount'' for the taxable year. In addition,
Sec. 53.4942(a)-3(a)(2)(i) generally includes distributions that
qualify as PRIs as ``qualifying distributions'' for purposes of meeting
the distribution requirements under section 4942. Section 53.4943-10(b)
excludes PRIs from being treated as business holdings for the purpose
of calculating excess business holdings subject to excise tax under
section 4943. Sections 53.4945-5(b)(4) and 53.4945-6(c)(1)(i) also make
clear that PRIs will not constitute taxable expenditures under section
4945, provided the private foundation exercises ``expenditure
responsibility'' in circumstances in which it is required to do so.
Among other expenditure responsibility requirements, a private
foundation must require a written commitment from the recipient of the
PRI that the funds received will be used only for the purposes of the
program-related investment. As noted, the primary purpose of a program-
related investment must be the accomplishment of a charitable purpose.
Section 53.4944-3(b) contains nine examples illustrating
investments that qualify as PRIs and one example of an investment that
does not qualify as a PRI. The existing examples focus on domestic
situations principally involving economically disadvantaged individuals
and deteriorated urban areas.
The Treasury Department and the IRS are aware that the private
foundation community would find it helpful if the regulations could
include additional PRI examples that reflect current investment
practices and illustrate certain principles, including that: (1) An
activity conducted in a foreign country furthers a charitable purpose
if the same activity would further a charitable purpose if conducted in
the United States; (2) the charitable purposes served by a PRI are not
limited to situations involving economically disadvantaged individuals
and deteriorated urban areas; (3) the recipients of PRIs need not be
within a charitable class if they are the instruments for furthering a
charitable purpose; (4) a potentially high rate of return does not
automatically prevent an investment from qualifying as program-related;
(5) PRIs can be achieved through a variety of
[[Page 23430]]
investments, including loans to individuals, tax-exempt organizations
and for-profit organizations, and equity investments in for-profit
organizations; (6) a credit enhancement arrangement may qualify as a
PRI; and (7) a private foundation's acceptance of an equity position in
conjunction with making a loan does not necessarily prevent the
investment from qualifying as a PRI.
Explanation of Provisions
The proposed regulations add nine new examples that illustrate that
a wider range of investments qualify as PRIs than the range currently
presented in Sec. 53.4944-3(b). The proposed regulations do not modify
the existing regulations; rather, they provide additional examples that
illustrate the application of the existing regulations. Generally, the
charitable activities illustrated in the new examples are based on
published guidance and on financial structures described in private
letter rulings.
The new examples demonstrate that a PRI may accomplish a variety of
charitable purposes, such as advancing science, combating environmental
deterioration, and promoting the arts. Several examples also
demonstrate that an investment that funds activities in one or more
foreign countries, including investments that alleviate the impact of a
natural disaster or that fund educational programs for poor
individuals, may further the accomplishment of charitable purposes and
qualify as a PRI. One example illustrates that the existence of a high
potential rate of return on an investment does not, by itself, prevent
the investment from qualifying as a PRI. Another example illustrates
that a private foundation's acceptance of an equity position in
conjunction with making a loan does not necessarily prevent the
investment from qualifying as a PRI, and two examples illustrate that a
private foundation's provision of credit enhancement can qualify as a
PRI.
The last example demonstrates that a guarantee arrangement may
qualify as a PRI. The proposed regulations address solely the impact of
section 4944 on the facts described and do not address whether there is
a qualifying distribution under section 4942. However, the Treasury
Department and the IRS conclude that, based on the facts described in
the last example, there would be no qualifying distribution under
section 4942 at the time the foundation enters into the guarantee
arrangement. Under certain circumstances, a private foundation may
treat payments made under a guarantee arrangement as qualifying
distributions.
Finally, the proposed regulations include examples illustrating
that loans and capital may be provided to individuals or entities that
are not within a charitable class themselves, if the recipients are the
instruments through which the private foundation accomplishes its
exempt activities.
Proposed Effective/Applicability Date
Paragraph (b), Examples 11 through 19 of this section will be
effective on the date of publication of the Treasury decision adopting
these examples as final regulations in the Federal Register. Taxpayers
may rely on paragraph (b), Examples 11 through 19 of this section
before these proposed regulations are finalized.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866, as supplemented by Executive Order 13563. Therefore, a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to this regulation, and because the regulation does not
impose a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, this regulation has been submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES heading.
The IRS and the Treasury Department request comments on all aspects of
the proposed rules. All comments will be available at
www.regulations.gov or upon request. A public hearing will be scheduled
if requested in writing by any person that timely submits written
comments. If a public hearing is scheduled, notice of the date, time,
and place for the public hearing will be published in the Federal
Register.
Drafting Information
The principal author of these proposed regulations is Courtney D.
Jones, Office of the Chief Counsel (Tax Exempt and Government
Entities). However, other personnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 53
Excise taxes, Foundations, Investments, Lobbying, Reporting and
recordkeeping requirements, Trusts and trustees.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 53 is proposed to be amended as follows:
PART 53--FOUNDATION AND SIMILAR EXCISE TAXES
Paragraph. 1. The authority citation for part 53 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 53.4944-3 is amended by adding Examples 11, 12, 13,
14, 15, 16, 17, 18, and 19 to paragraph (b) and adding paragraph (c) to
read as follows:
Sec. 53.4944-3 Exception for program-related investments.
* * * * *
(b) * * *
Example 11. X is a business enterprise that researches and
develops new drugs. X's research demonstrates that a vaccine can be
developed within ten years to prevent a disease that predominantly
affects poor individuals in developing countries. However, neither X
nor other commercial enterprises like X will devote their resources
to develop the vaccine because the potential return on investment is
significantly less than required by X or other commercial
enterprises to undertake a project to develop new drugs. Y, a
private foundation, enters into an investment agreement with X in
order to induce X to develop the vaccine. Pursuant to the investment
agreement, Y purchases shares of the common stock of S, a subsidiary
corporation that X establishes to research and develop the vaccine.
The agreement requires S to distribute the vaccine to poor
individuals in developing countries at a price that is affordable to
the affected population. The agreement also requires S to publish
the research results, disclosing substantially all information about
the results that would be useful to the interested public. S agrees
that the publication of its research results will be made as
promptly after the completion of the research as is reasonably
possible without jeopardizing S's right to secure patents necessary
to protect its ownership or control of the results of the research.
The expected rate of return on Y's investment in S is less than the
expected market rate of return for an investment of similar risk.
Y's primary purpose in making the investment is to advance science.
No significant purpose of the investment involves the production of
income or the appreciation of property. The investment significantly
furthers the accomplishment of Y's exempt activities and would not
have been made but for such relationship between the investment and
Y's
[[Page 23431]]
exempt activities. Accordingly, the purchase of the common stock of
S is a program-related investment.
Example 12. Q, a developing country, produces a substantial
amount of recyclable solid waste materials that are currently
disposed of in landfills and by incineration, contributing
significantly to environmental deterioration in Q. X is a new
business enterprise located in Q. X's only activity will be
collecting recyclable solid waste materials in Q and delivering
those materials to recycling centers that are inaccessible to a
majority of the population. If successful, the recycling collection
business would prevent pollution in Q caused by the usual
disposition of solid waste materials. X has obtained funding from
only a few commercial investors who are concerned about the
environmental impact of solid waste disposal. Although X made
substantial efforts to procure additional funding, X has not been
able to obtain sufficient funding because the expected rate of
return is significantly less than the acceptable rate of return on
an investment of this type. Because X has been unable to attract
additional investors on the same terms as the initial investors, Y,
a private foundation, enters into an investment agreement with X to
purchase shares of X's common stock on the same terms as X's initial
investors. Although there is a high risk associated with the
investment in X, there is also the potential for a high rate of
return if X is successful in the recycling business in Q. Y's
primary purpose in making the investment is to combat environmental
deterioration. No significant purpose of the investment involves the
production of income or the appreciation of property. The investment
significantly furthers the accomplishment of Y's exempt activities
and would not have been made but for such relationship between the
investment and Y's exempt activities. Accordingly, the purchase of
the common stock is a program-related investment.
Example 13. Assume the facts as stated in Example 12, except
that X offers Y shares of X's common stock in order to induce Y to
make a below-market rate loan to X. X previously made the same offer
to a number of commercial investors. These investors were unwilling
to provide loans to X on such terms because the expected return on
the combined package of stock and debt was below the expected market
return for such an investment based on the level of risk involved,
and they were also unwilling to provide loans on other terms X
considers economically feasible. Y accepts the stock and makes the
loan on the same terms that X offered to the commercial investors. Y
plans to liquidate its stock in X as soon as the recycling
collection business in Q is profitable or it is established that the
business will never become profitable. Y's primary purpose in making
the investment is to combat environmental deterioration. No
significant purpose of the investment involves the production of
income or the appreciation of property. The investment significantly
furthers the accomplishment of Y's exempt activities and would not
have been made but for such relationship between the investment and
Y's exempt activities. Accordingly, the loan accompanied by the
acceptance of common stock is a program-related investment.
Example 14. X is a business enterprise located in V, a rural
area in State Z. X employs a large number of poor individuals in V.
A natural disaster occurs in V, causing significant damage to the
area. The business operations of X are harmed because of damage to
X's equipment and buildings. X has insufficient funds to continue
its business operations and conventional sources of funds are
unwilling or unable to provide loans to X on terms it considers
economically feasible. In order to enable X to continue its business
operations, Y, a private foundation, makes a loan to X bearing
interest below the market rate for commercial loans of comparable
risk. Y's primary purpose in making the loan is to provide relief to
the poor and distressed. No significant purpose of the loan involves
the production of income or the appreciation of property. The loan
significantly furthers the accomplishment of Y's exempt activities
and would not have been made but for such relationship between the
loan and Y's exempt activities. Accordingly, the loan is a program-
related investment.
Example 15. A natural disaster occurs in W, a developing
country, causing significant damage to W's infrastructure. Y, a
private foundation, makes loans bearing interest below the market
rate for commercial loans of comparable risk to H and K, poor
individuals who live in W, to enable each of them to start a small
business. H will open a roadside fruit stand. K will start a weaving
business. Conventional sources of funds were unwilling or unable to
provide loans to H or K on terms they consider economically
feasible. Y's primary purpose in making the loans is to provide
relief to the poor and distressed. No significant purpose of the
loans involves the production of income or the appreciation of
property. The loans significantly further the accomplishment of Y's
exempt activities and would not have been made but for such
relationship between the loans and Y's exempt activities.
Accordingly, the loans to H and K are program-related investments.
Example 16. X is a limited liability company treated as a
partnership for federal income tax purposes. X purchases coffee from
poor farmers residing in a developing country, either directly or
through farmer-owned cooperatives. To fund the provision of
efficient water management, crop cultivation, pest management, and
farm management training to the poor farmers by X, Y, a private
foundation, makes a loan to X bearing interest below the market rate
for commercial loans of comparable risk. The loan agreement requires
X to use the proceeds from the loan to provide the training to the
poor farmers. X would not provide such training to the poor farmers
absent the loan. Y's primary purpose in making the loan is to
educate poor farmers about advanced agricultural methods. No
significant purpose of the loan involves the production of income or
the appreciation of property. The loan significantly furthers the
accomplishment of Y's exempt activities and would not have been made
but for such relationship between the loan and Y's exempt
activities. Accordingly, the loan is a program-related investment.
Example 17. X is a social welfare organization that is
recognized as an organization described in section 501(c)(4). X was
formed to develop and encourage interest in painting, sculpture and
other art forms by, among other things, conducting weekly community
art exhibits. X needs to purchase a large exhibition space to
accommodate the demand for exhibition space within the community.
Conventional sources of funds are unwilling or unable to provide
funds to X on terms it considers economically feasible. Y, a private
foundation, makes a loan to X at an interest rate below the market
rate for commercial loans of comparable risk to fund the purchase of
the new space. Y's primary purpose in making the loan is to promote
the arts. No significant purpose of the loan involves the production
of income or the appreciation of property. The loan significantly
furthers the accomplishment of Y's exempt activities and would not
have been made but for such relationship between the loan and Y's
exempt activities. Accordingly, the loan is a program-related
investment.
Example 18. X is a non-profit corporation that provides child
care services in a low-income neighborhood, enabling many residents
of the neighborhood to be gainfully employed. X meets the
requirements of section 501(k) and is recognized as an organization
described in section 501(c)(3). X's current child care facility has
reached capacity and has a long waiting list. X has determined that
the demand for its services warrants the construction of a new child
care facility in the same neighborhood. X is unable to obtain a loan
from conventional sources of funds including B, a commercial bank,
because X lacks sufficient credit to support the financing of a new
facility. Pursuant to a deposit agreement, Y, a private foundation,
deposits $h in B, and B lends an identical amount to X to construct
the new child care facility. The deposit agreement requires Y to
keep $h on deposit with B during the term of X's loan and provides
that if X defaults on the loan, B may deduct the amount of the
default from the deposit. To facilitate B's access to the funds in
the event of default, the agreement requires that the funds be
invested in instruments that allow B to access them readily. The
deposit agreement also provides that Y will earn interest at a rate
of t% on the deposit. The t% rate is substantially less than Y could
otherwise earn on this sum of money, if Y invested it elsewhere. The
loan agreement between B and X requires X to use the proceeds from
the loan to construct the new child care facility. Y's primary
purpose in making the deposit is to further its educational purposes
by enabling X to provide child care services within the meaning of
section 501(k). No significant purpose of the deposit involves the
production of income or the appreciation of property. The deposit
significantly furthers the accomplishment of Y's exempt activities
and would not have been made but for such relationship between the
deposit and Y's exempt activities. Accordingly, the deposit is a
program-related investment.
[[Page 23432]]
Example 19. Assume the same facts as stated in Example 18,
except that instead of making a deposit of $h into B, Y enters into
a guarantee agreement with B. The guarantee agreement provides that
if X defaults on the loan, Y will repay the balance due on the loan
to B. B was unwilling to make the loan to X in the absence of Y's
guarantee. X must use the proceeds from the loan to construct the
new child care facility. At the same time, X and Y enter into a
reimbursement agreement whereby X agrees to reimburse Y for any and
all amounts paid to B under the guarantee agreement. The signed
guarantee and reimbursement agreements together constitute a
``guarantee and reimbursement arrangement.'' Y's primary purpose in
entering into the guarantee and reimbursement arrangement is to
further Y's educational purposes. No significant purpose of the
guarantee and reimbursement arrangement involves the production of
income or the appreciation of property. The guarantee and
reimbursement arrangement significantly furthers the accomplishment
of Y's exempt activities and would not have been made but for such
relationship between the guarantee and reimbursement arrangement and
Y's exempt activities. Accordingly, the guarantee and reimbursement
arrangement is a program-related investment.
(c) Effective/applicability date. Paragraph (b), Examples 11
through 19 of this section will be effective on the date of publication
of the Treasury decision adopting these examples as final regulations
in the Federal Register. Taxpayers may rely on paragraph (b), Examples
11 through 19 of this section before these proposed regulations are
finalized.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-9468 Filed 4-18-12; 8:45 am]
BILLING CODE 4830-01-P
