CoF Advanced Legal Seminar – Program-Related Investments

The Advanced Legal Seminar given at the Council on Foundations Conference featured Lisa Johnsen of Kirkpatrick & Lockhart Preston Gates Ellis; Marcus Owens of Caplin & Drysdale and former head of the Exempt Organizations division of the IRS; LaVerne Woods of Davis Wright & Tremaine and Chair of the American Bar Association Section of Taxation Exempt Organizations Committee; Janne Gallagher of the Council on Foundations; and Dan Moore of Guidestar.  The Seminar focused on the following four subjects:

  1. Program-related investments;
  2. Low-profit limited liability companies (L3Cs)
  3. Prohibited tax shelter transactions
  4. Legislative and regulatory changes affecting supporting organizations


Johnsen opened the discussion by noting the current energy in the social entrepreneurship  /social enterprise area.  While it may not be a new idea, over the past few years, there has been much attention focused on the use of alternative legal structures to achieve social good.

Foundations may make investments in, and loans to, social enterprises in the form of program-related investments (PRIs), which are specifically excepted from the definition of a jeopardizing investment that would trigger an excise tax under Section 4944 of the Internal Revenue Code.  A PRI must have the primary purpose of advancing the foundation’s charitable objectives, and must not have as a significant purpose the production of income or the appreciation of property.  Johnsen cited two private letter rulings that offer guidance. 

In PLR 200610020, the IRS ruled that a foundation’s proposed capital contributions to a limited liability company would qualify as a PRI because the primary purpose of such contributions was to enhance social welfare, support community improvement, eliminate prejudice and discrimination, and provide economic self-sufficiency by serving, or providing investment capital for, low-income communities, or low-income persons by making investments in, or providing technical assistance to, portfolio companies located in low-income areas and owned or controlled by members of disadvantaged populations.   

In PLR 200603031, the IRS ruled that a private foundation’s grants, contracts or PRIs with private industry (the "Transactions") would constitute qualifying distributions for purposes of Section 4942(g) of the Code, and not taxable expenditures for purposes of 4945(d)(5) of the Code, where the foundation entered into the Transactions to promote or accelerate scientific research and development of solutions to prevent, eliminate, or eradicate diseases disproportionately impacting the developing world and to increase the availability of such solutions in low-resource settings.

Owens noted that while PRIs have existed since 1969, they are not widely used.  This is likely due to three factors:  (1) the complexity of the rules, (2) the planning and due diligence costs, and (3) the potentially steep cost of any misstep (e.g., taxable expenditure, jeopardizing investment). 

One possible solution for making the use of PRIs more attractive to foundations would be the IRS’s issuance of private letter rulings certifying certain types of businesses as accomplishing charitable purposes, making them appropriate recipients of PRIs.  Such rulings, with appropriate consents, could be compiled in a database made accessible to funders and potential recipients.  They could make it easier and safer for foundations to implement PRIs as part of their strategies.

You can read more about PRIs at the following sites:

Program-related investments – IRS

PRI Makers Network, an association of grantmakers that use PRIs

"Program Related Investing – Skills and Strategies for New PRI Funders" – GrantCraft