5.4.2 Basic Quiz -- Jeopardizing Investment Exceptions

If a private foundation accepts by bequest investments that are inherently risky, the foundation will be subject to the 10% penalty tax in Sec. 4944.

True False

Bob, manager of the Builder's Foundation, accepted a bequest of investments in oil wells. Bob decided to hold the investments rather than sell an reinvest in safer equities or bonds. Bob is subject to a penalty tax on the investments.

True False

A prudent manager will sell jeopardy investments received by bequest and invest in conventional stocks and bonds.

True False

A program-related investment is one in which the investment is significantly related to the foundation's exempt purpose.

True False

Program-related investments are designed to bring a large amount of income to a private foundation.

True False

Investments must not be geared toward influencing a political campaign.

True False

Once an investment has been deemed a "program-related investment," the investment will tend to hold that status even if it grows in the range of its function.

True False

Joe Slick is the manager of Guitars from the Stars, a private foundation that teams up with music stars to provide musical instruction to disadvantaged children. Joe recently invested a portion of the foundation's assets in a start-up company that provides musical instruments to schools, churches and charities at low costs. The company is not well established and is considered a risky investment. Joe is subject to the 10% tax penalty.

True False

Two years ago, Michelle bought stock in Slimy and Shady Corporation. The investment, then and now, is considered a risky one. While Michelle has made a small profit on the investment, she has decided to make a gift of the stock to her favorite private foundation. The foundation may accept Michelle's gift without fear of the penalty tax.

True False

Rich Herd is the primary manager at the Equestrian Survival Ranch, a private foundation that cares for neglected horses. Rich has decided to invest in a company that makes horse feed and medical supplies for horses. The company is owned by a man running for the Governor's office. Rich wants to invest solely in order to show his support, albeit indirectly, to the candidate. Rich and Equestrian Survival Ranch are both subject to a penalty tax of 10%.