Gift or Bequest of Assets
The first exception for jeopardizing investments applies to property transferred to a private foundation or charitable remainder trust by gift or bequest. If the asset is transferred by gift or bequest, the jeopardizing investment rules do not apply. Reg. 53.4944-1(a)(2)(ii)(a).
While the exception does apply for assets contributed to the private foundations (PFs) or charitable trusts (CRTs), managers should consider their general obligations under federal and state law to act with reasonable prudence. If assets such as commodity futures, working interests in oil and gas or options are transferred to a PF or CRT, most managers will decide that it is prudent to sell these investments and acquire a fairly conventional stock-bond securities portfolio.
Program-Related Investment Exception
An additional exception exists for program-related investments. These are any investments related to the exempt purpose of the PF. Reg. 53.4944-1(a)(1). The program-related investment accomplishes one of the exempt purposes of the charity, it is not designed to produce significant income or appreciation and it may not be for the purpose of influencing any political campaign.
If a program-related investment is funded, it will retain its status. Even if the asset modifies its function, it ordinarily may be held once it has required the initial program-related status.
Example 5.4.2A
Loanco is a small business that makes loans to businesses in a very depressed section of its community. It suffers a fairly high default rate, but also can point to a number of success stories. Many of the individuals who use the loans to start small businesses might otherwise be dependent upon government benefits. PF extends a loan on favorable terms to Loanco. The purposes of the loans are consistent with PF's exempt goals to assist needy people and equip them to escape from government dependency and learn marketable skills. Even though the loan does not return a high interest rate and bears greater risk than a commercial investment, PF is permitted to make the loan to Loanco under the program-related investment exceptions.
