All In The Mission

How do the other private  foundation rules come into play?

Since a PRI is a qualifying distribution that counts toward meeting the foundation’s annual minimum distribution requirement, the foundation will need to plan for appropriate accounting of PRIs, both when investments are made and also when they are repaid. When the foundation exits a PRI, either by being redeemed by the recipient or by selling its interest to a third party, the foundation’s tax liability is computed on any resulting capital gain at the usual 1% or 2% tax rate. Moreover, any such recovery of a PRI will result in a commensurate increase in next year’s annual minimum distribution requirement.

Because a PRI is reported as an “exempt function,” or charitable asset, on the foundation’s balance sheet, the PRI is excluded from the investment asset base referenced to calculate the foundation’s annual minimum distribution requirement. For example, an investment of $1 million in a traditional stock that does not appreciate or depreciate in value would give rise each year to a $50,000 minimum distribution requirement. By contrast, an investment of $1 million in an equity PRI that likewise does not fluctuate in value would not give rise to any annual minimum distribution requirement because the PRI would be excluded from the asset base referenced to calculate the requirement.

A PRI is not included in the calculation of excess business holdings, so a foundation may own more than 20% of an entity if its investment is a PRI.

A foundation needs to be very careful to avoid self-dealing if it co-invests in any company, including via a PRI, with its substantial contributors or its officers or directors.

When a foundation invests in a for-profit entity, it must exercise expenditure responsibility, including:

• A pre-grant inquiry.

• A written contract containing the PRI and expenditure responsibility terms set forth in IRS regulations, including the right to have the PRI repaid if the PRI recipient does not use the PRI funds properly.

• Proper reports and certifications back from the PRI recipient.

• Proper reporting of the PRI to the IRS.


Jeffrey D. Haskell, J.D., LL.M., is chief legal officer at Foundation Source. David A. Levitt, J.D., and Robert  A. Wexler, J.D., are attorneys at Adler & Colvin.