A program related investment (PRI) is a powerful tool for a private foundation to positively influence social enterprise while advancing its philanthropy and satisfying its 5% annual minimum distribution requirement.
Traditionally, private foundations have used grant-making activities as the primary means to satisfy their 5% annual minimum payout requirement and to accomplish their tax exempt purposes. However, modern trends reveal a new focus of private foundations on PRIs to achieve the same results.
What is a PRI?
A PRI is an investment, rather than a grant, whose primary purpose is to achieve one or more of the private foundation’s tax exempt purposes and no significant purposes of which is the production of income or the appreciation of property. However, the fact that an investment produces significant income or capital appreciation is not conclusive evidence that income or appreciation was a significant purpose of the investment, and, therefore, does not preclude the investment from being a valid PRI. As a practical matter, many PRIs produce income or capital appreciation. The test is whether the production of income or capital appreciation is a significant purpose of the investment over the tax exempt purposes of the investment. As long as the tax exempt purpose of the investment is strong, the production of income or capital appreciation should be viewed as a mere ancillary benefit.
A PRI is also a great benefit to a private foundation. PRI counts towards a foundation’s qualifying distributions just as if they were grants and are exempt from the excess business holdings tax (imposed on foundation investments that exceed 20 percent of a for-profit venture) and the jeopardizing investment tax (imposed on investments that jeopardize the tax exempt purposes of a foundation).
The Chronicle of Philanthropy recently released its list of the Top 10 biggest charitable gifts of 2013 (which is really the Top 15, since 5 gifts tied at 10th place), and do they make me wish I qualified as a charity!
Topping the list at Number 1 were Mark Zuckerberg of Facebook, and his wife, Priscilla Chan, who gifted $992.2 million of Facebook shares to the Silicon Valley Community Foundation. Number 2 on the list were Nike Chairman Phil Knight and his wife, Penelope Knight, who made a $500 million pledge to the Oregon Health and Science University Foundation.
The list continues:
3. Michael Bloomberg: $350 million pledge to Johns Hopkins University (more…)
Once again, the Internal Revenue Service reminds us in PLR 201330011 that a distribution from an IRA to a residuary beneficiary will not result in recognition of IRD (also known as income in respect of a decedent) to the estate or trust, as only the residuary beneficiary will recognize the IRD.
Here the Decedent’s Estate was the beneficiary of the Decedent’s IRA. Under the provisions of the Decedent’s Will, his Estate poured over to his Revocable Trust on his death. His Revocable Trust provided that each of two Charities were to receive a percentage of the residue of his Trust, and further provided that the Trustee could satisfy this percentage gift in cash or in kind and also could allocate different assets to different residuary beneficiaries in satisfaction of their percentage interest in the trust residue.
Of course, the IRA constitutes income in respect of a decedent (IRD), and pursuant to IRC § 691 (a)(2) and Reg. § 1.691(a)-4(b)(2), the transfer of an item of IRD by an estate, such as by satisfying an obligation of the estate, will cause the estate to recognize the IRD, but if the estate transmits the item of IRD to a specific legatee of the item of IRD or to a residuary beneficiary (emphasis added), only the legatee or the residuary beneficiary will recognize the IRD. (more…)
Originally posted on our sister blog, www.bryancavecharitylaw.com
Previously, I blogged about the low interest rate environment and how that results in a great opportunity for a donor with charitable objectives who also wishes to pass assets to the next generation free of federal estate or generation-skipping transfer tax. To read that posting about Charitable Lead Trusts, click here. Well, rates have continued to stay at historic lows. The IRS just announced the rates available for June of 1.2%. These low rates mean that it’s easier then ever for these trusts to be productive to pass even more cash to lower generations free of transfer tax. So, if you think that the trust’s investment strategy could beat the IRS-decreed rate of 1.2%, while also benefiting charity, June is the time.
For an overview regarding the basics of lifetime CLTs, see A Primer on Lifetime Charitable Lead Trusts.
Tax practitioners have long believed that donations could be made to single member LLCs wholly owned by section 501(c)(3) organizations on the theory that, for tax purposes, the donation was treated as made to the charity and not the LLC. In long awaited guidance, the IRS has finally agreed in Notice 2012-52. The analysis in the notice is not surprising, and is in fact, exactly what tax practitioners have been arguing ever since disregarded entities came into existence.
Generally, a business entity that has a single owner and that is not a corporation is treated as disregarded as an entity separate from its owner. These “business entities” are typically limited liability companies. If an entity is disregarded, its operations and activities are treated in the same manner as a sole proprietorship, branch, or division of the owner, and the owner generally reports all income, loss, deductions, and credits on its own tax return. Thus, any contribution to a disregarded entity would be reported on the owner’s return as a contribution. Practitioners believed that this result meant that the donor was treated as contributing to the charitable organization, rather than the LLC, and was thus entitled to a charitable contribution deduction. Prior to the recent guidance, the IRS was unwilling to agree or disagree with this position.
On July 31, however, the IRS finally ruled that donations to a domestic single member LLC whose sole owner is a section 501(c)(3) organization will be treated as donations to a branch of the 501(c)(3) organization. Accordingly, donors will be entitled to a charitable contribution deduction. The IRS has also asked, but not required, that charities disclose in a acknowledgment or other statement to the donor that the single member LLC is wholly owned by a charity and treated by the charity as disregarded.
At the request of Congress, the Department of Treasury recently issued a report on donor advised funds. Among other things, Congress had asked the Department of Treasury whether donations to a donor advised fund should be tax-deductible, whether such donations should be treated as donations to a public charity, and whether donor-advised funds should have a minimum distribution requirement. The Department of Treasury answered “yes” to the first two questions and “no” to the third, maintaining the status quo.
The full report can be read here: http://www.treasury.gov/resource-center/tax-policy/documents/supporting-organizations-and-donor-advised-funds-12-5-11.pdf.