• September 18, 2014

White House Seeks to Spur Innovative Spending by Foundations

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Richard White/Chronicle of Philanthropy

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Richard White/Chronicle of Philanthropy

The Obama administration has proposed new rules designed to encourage foundations to spend money to promote the social good in ways other than grants, for example through low-interest loans or stock purchases in for-profit companies.

Foundations have historically been reluctant to use such program-related investments “because of confusion about how they work and the high costs associated with them,” Jonathan Greenblatt, a White House official, said in a blog post.

The proposal, drafted by the Treasury Department and Internal Revenue Service, would update current regulations to include nine new examples of activities that qualify as program-related investments because they further a foundation’s charitable purposes. Such spending is exempt from excise taxes that penalize foundations for making risky investments.

The new language clarifies, for example, that program-related investments can support activities in rural areas and countries outside the United States, as well as a variety of charitable purposes including advancing science and promoting the arts.

Decreasing Legal Risks

A committee of lawyers who specialize in nonprofit issues has been working for more than a decade to persuade the federal government to update the rules, which were initially tailored in the early 1970s to cover mostly domestic projects involving low-income people and deteriorated urban areas.

Robert A. Wexler, a lawyer in San Francisco who is vice chair of the committee—set up under the American Bar Association’s tax section—said the proposed rules incorporate many of the committee’s ideas.

He said foundations have expanded the use of program-related investments over the years but often feel obligated to seek legal opinions or IRS rulings before proceeding. The new rules would make them feel more comfortable trying innovative spending approaches, he said.

Foundations are legally required to spend a minimum of 5 percent of their investment assets each year, and program-related investments are excluded when calculating the amount of the assets.

Among the examples included in the new rules, a foundation is  allowed to make a program-related investment when it:

• Offers a low-interest loan to a business in a rural area that has been damaged by a natural disaster. The company employs a large number of poor people and cannot get conventional loans on terms that it considers affordable. The foundation’s primary reason for making the loan is to “provide relief to the poor and distressed.”

• Buys stock in a company set up to research and develop a vaccine within 10 years to prevent a disease that affects mostly poor people in developing countries. The company is a subsidiary of a pharmaceutical corporation that does not want to spend money to develop the drug because the return on investment is likely to be low. The foundation, which requires the company to distribute the vaccine to poor people in developing countries at low prices, makes the investment primarily to advance science.

• Backs a loan to help a nonprofit child-care group build a new center to serve children in a low-income neighborhood. The foundation deposits the amount of the loan with a bank, which can deduct any money that the nonprofit fails to pay back. The money earns a low interest rate. The foundation’s primary goal is to further its educational purposes.

The Treasury Department is accepting comments on the draft rules until July 18.

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