[Federal Register Volume 81, Number 79 (Monday, April 25, 2016)]
[Rules and Regulations]
[Pages 24014-24019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09396]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 53

[T.D. 9762]
RIN 1545-BK76


Examples of Program-Related Investments

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide guidance 
to private foundations on program-related investments. The final 
regulations provide a series of examples illustrating investments that 
qualify as program-related investments. In addition to private 
foundations, these final regulations affect foundation managers who 
participate in the making of program-related investments.

DATES: These regulations are effective April 25, 2016.

FOR FURTHER INFORMATION CONTACT: Robin Ehrenberg at (202) 317-4086 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 53 under section 
4944(a) of the Internal Revenue Code (Code). Section 4944(a) imposes an 
excise tax on a private foundation that makes an investment that 
jeopardizes the carrying out of its exempt purposes (a ``jeopardizing 
investment''). Section 4944(c) provides that investments that are 
program-related investments (``PRIs'') are not jeopardizing 
investments. Section 4944(c) defines a PRI as an investment: (1) The 
primary purpose of which is to accomplish one or more of the purposes 
described in section 170(c)(2)(B); and (2) no significant purpose of 
which is the production of income or the appreciation of property.\1\
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    \1\ The regulations under section 4944(c) further provide that 
no purpose of a PRI may be to accomplish one or more of the purposes 
described in section 170(c)(2)(D) (attempting to influence 
legislation or participating in or intervening in any political 
campaign). Treas. Reg. Sec.  53.4944-3(a)(1)(iii).
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    The regulations under section 4944(c) provide that an investment is 
made primarily to accomplish one or more of the purposes described in 
section

[[Page 24015]]

170(c)(2)(B) (referred to in this preamble as ``exempt purposes'') if 
it significantly furthers the accomplishment of the private 
foundation's exempt activities and would not have been made but for the 
relationship between the investment and the accomplishment of those 
exempt activities. Section 53.4944-3(a)(2)(i). In determining whether 
no significant purpose of an investment is the production of income or 
the appreciation of property, Sec.  53.4944-3(a)(2)(iii) provides that 
it shall be relevant whether investors who are engaged in the 
investment solely for the production of income would be likely to make 
the investment on the same terms as the private foundation. Section 
53.4944-3(a)(2)(iii) further provides that the fact that an investment 
produces significant income or capital appreciation shall not, in the 
absence of other factors, be conclusive evidence of a significant 
purpose involving the production of income or the appreciation of 
property.
    Since 1972, Sec.  53.4944-3(b) has contained nine examples 
illustrating investments that qualify as PRIs and one example of an 
investment that does not qualify as a PRI. These long-standing examples 
focus on domestic situations principally involving economically 
disadvantaged individuals and deteriorated urban areas.
    On April 19, 2012, a notice of proposed rulemaking (REG-144267-11) 
relating to PRIs was published in the Federal Register (77 FR 23429). 
The notice of proposed rulemaking (NPRM) contained proposed regulations 
that would add nine new examples to Sec.  53.4944-3(b). The proposed 
examples demonstrated that PRIs may accomplish a variety of exempt 
purposes (and are not limited to situations involving economically 
disadvantaged individuals and deteriorated urban areas), may fund 
activities in one or more foreign countries, and may earn a high 
potential rate of return. The proposed examples also illustrated that a 
PRI may take the form of an equity position in conjunction with making 
a loan, and that a private foundation's provision of credit 
enhancements can qualify as a PRI. In addition, the examples 
illustrated that loans and capital may be provided to individuals or 
entities that are not within a charitable class themselves, if the 
recipients are the instruments through which the private foundation 
accomplishes its exempt activities.
    No public hearing on the NPRM was requested or held; however, 15 
comments from the public were received. All comments are available at 
www.regulations.gov or upon request. After consideration of the 
comments, the proposed regulations are adopted as amended by this 
Treasury decision.

Summary of Comments and Explanation of Revisions

1. Recommended Changes to Proposed Examples

    While commenters generally lauded the issuance of the proposed 
regulations and supported issuing them as final regulations, some 
commenters suggested a few modifications to the examples contained in 
the proposed regulations.
    One commenter suggested amending Example 11, which involved a 
private foundation's investment in a subsidiary of a drug company for 
the development of a vaccine to prevent a disease that predominantly 
affects poor individuals in developing countries. Under the investment 
agreement described in the Example, the subsidiary is required to 
distribute the vaccine to the poor individuals in developing countries 
at a price that is affordable to the affected population and to 
promptly publish its research results. The commenter recommended that 
the example be modified to make it clear that the subsidiary can also 
sell the vaccine to those who can afford it at fair market value 
prices. The final regulations amend Example 11 to adopt this 
clarification, which is appropriate given that the Example also 
specifies that Y's primary purpose in making the investment is to fund 
scientific research in the public interest and no significant purpose 
of the investment involves the production of income or the appreciation 
of property.
    The commenter also recommended removing the publication requirement 
described in Example 11, contending that the provision of the vaccine 
to the poor at affordable prices without more furthers the 
accomplishment of exempt purposes. Example 11 illustrated a known fact 
pattern that was presented in a private letter ruling issued by the 
IRS. Although it is not possible for the regulations to provide 
examples illustrating every conceivable fact pattern, the Treasury 
Department and the IRS note that other fact patterns that do not 
contain all of the same elements as those illustrated by Example 11 may 
nonetheless further an exempt purpose if the requirements of the 
regulations are otherwise satisfied. Accordingly, the final regulations 
do not adopt this comment.
    One commenter suggested modifying Example 13, which involved a 
private foundation that accepts common stock in a business enterprise 
as part of a loan to the business and that plans to liquidate the stock 
as soon as the business becomes profitable or it is established that 
the business will never become profitable. The commenter requested that 
the sentence in the example regarding the liquidation of the stock be 
removed or amended to clarify whether a foundation must sell its stock 
in a business that becomes profitable for the investment in that stock 
to be a PRI. In response to the comment, this sentence has been removed 
from the example. The Treasury Department and the IRS note, however, 
that the establishment, at the outset of an investment, of an exit 
condition that is tied to the foundation's exempt purpose in making the 
investment can be an important indication that a foundation's primary 
purpose in undertaking the investment is in fact accomplishment of the 
exempt purpose.
    Two commenters suggested modifying Example 15, which involved loans 
by a private foundation to two poor individuals living in a developing 
country where a natural disaster has occurred. One commenter noted that 
loans that enable poor persons to become economically self-sufficient 
by starting a small business qualify as PRIs without the necessity for 
a natural disaster to have occurred. In response to this comment, the 
final regulations amend Example 15 to eliminate the reference to a 
natural disaster. Another commenter suggested modifying Example 15 to 
refer to a ``foreign country'' rather than a ``developing country,'' 
noting that providing disaster relief to a foreign country, whether or 
not it is a developing country, furthers the accomplishment of exempt 
purposes. As noted in the preamble to the NPRM, several examples in the 
proposed regulations illustrated the principle that an activity 
conducted in a foreign country furthers an exempt purpose if the same 
activity would further an exempt purpose if conducted in the United 
States. This principle applies equally to all foreign countries. 
However, the final regulations do not change the reference to a 
developing country in Example 15, because the example illustrates PRIs 
in the context of microloans, which are currently more common in 
developing countries. In addition, because organizations making 
microloans often provide loans to many individuals, the final 
regulations modify the example to reference loans to a group of 
individuals, rather than two specific individuals with identified 
business endeavors.
    One commenter suggested modifying Example 16, which described a 
loan to a limited liability company (LLC), to describe an equity 
investment in an

[[Page 24016]]

LLC. When a private foundation makes an equity investment in an LLC (or 
other entity) treated as a partnership for federal tax purposes, the 
activities of the LLC are attributed to the foundation for purposes of 
determining both whether the foundation operates exclusively for exempt 
purposes (and therefore continues to qualify for exemption under 
section 501(c)(3)) and whether the foundation has engaged in an 
unrelated trade or business described in section 511. See Rev. Rul. 
2004-51 (2004-1 CB 974). As a result, investments in partnership 
interests by section 501(c)(3) organizations raise a host of issues 
that are not raised by loans or by investments in stock of 
corporations. These issues necessitate consideration and analysis of a 
variety of facts and circumstances that are difficult to summarize in 
examples in regulations, and hence investments by section 501(c)(3) 
organizations in partnership interests have been addressed primarily 
through revenue rulings. See Rev. Rul. 2004-51, Rev. Rul. 98-15 (1998-1 
CB 718). Accordingly, the Treasury Department and the IRS do not adopt 
this comment but are considering whether to address PRIs in the form of 
investments in partnership interests through the issuance of a revenue 
ruling.
    Finally, one commenter recommended that the examples be amended to 
demonstrate the ability of a foundation to set PRI terms at above the 
prime rate. The examples in the proposed regulations generally referred 
to the interest rate or rate of return on a PRI as being less than the 
expected ``market rate'' for an investment of comparable risk and did 
not contain any suggestion that the rate of return of a PRI must fall 
below an absolute percentage threshold, such as the prime rate, to 
demonstrate no significant purpose involving the production of income 
or the appreciation of property. In addition, one example, Example 12, 
referred to the potential for a high rate of return if the recipient 
business is successful. Thus, the final regulations do not adopt this 
comment to expressly state in an example that the rate of return on a 
PRI may exceed the prime rate.

2. Principles Illustrated in the Examples

    The preamble to the NPRM noted that the additional PRI examples in 
the proposed regulations illustrated that: (1) An activity conducted in 
a foreign country furthers an exempt purpose if the same activity would 
further an exempt purpose if conducted in the United States; (2) the 
exempt purposes served by a PRI are not limited to situations involving 
economically disadvantaged individuals and deteriorated urban areas; 
(3) the recipients of PRIs need not be within a charitable class if 
they are the instruments for furthering a exempt purpose; (4) a 
potentially high rate of return does not automatically prevent an 
investment from qualifying as a PRI; (5) PRIs can be achieved through a 
variety of investments, including loans to individuals, tax-exempt 
organizations and for-profit organizations, and equity investments in 
for-profit organizations; (6) a credit enhancement arrangement may 
qualify as a PRI; and (7) a private foundation's acceptance of an 
equity position in conjunction with making a loan does not necessarily 
prevent the investment from qualifying as a PRI.
    One commenter recommended that this statement of principles (which 
it called ``extremely helpful guidance'') be included in the text of 
the final regulations so that the principles are readily accessible to 
grantmaking organizations. The principles helped identify areas in 
which clarification through examples would be helpful. The Treasury 
Department and the IRS believe that each of these seven principles is 
adequately reflected in the new examples themselves. Accordingly, the 
final regulations do not adopt this comment. Alternatively, the 
commenter suggested that the principles be preserved in another readily 
accessible place, like the IRS' Web site. In response to this comment, 
the IRS intends to post the principles on its Web site.

3. Recommendations for Additional Examples

    A number of commenters suggested additional examples to be added to 
the final regulations. For example, two commenters recommended 
including examples involving PRIs to support news media or mixed-income 
housing or to lessen the burdens of government, while another commenter 
suggested examples involving economic development through the promotion 
of technology-based enterprises. The proposed regulations contained 
nine new examples involving many different exempt purposes, such as 
scientific research in the public interest, combating environmental 
deterioration, and education. The Treasury Department and the IRS 
believe these additional examples adequately illustrate the principle 
that a PRI may accomplish a variety of exempt purposes. These 
regulations under section 4944 are not intended to provide an example 
of every exempt purpose, and there are many examples of exempt purposes 
in both regulations and sub-regulatory guidance under section 
501(c)(3). Therefore, additional examples of exempt purposes are not 
provided in these regulations. However, if commenters or other 
organizations believe additional guidance is needed under section 
501(c)(3) regarding whether particular activities further charitable 
purposes, private letter rulings or guidance of general applicability 
may be requested. Accordingly, the final regulations do not adopt these 
comments.
    One commenter recommended including an additional example of a 
foundation assuming certain risks to catalyze the entry of private 
investment capital. The proposed regulations already included two 
examples of a foundation assuming certain risks (specifically, in the 
form of a deposit agreement and a guarantee) to catalyze the entry of 
private investment capital. Thus, the Treasury Department and the IRS 
do not believe that additional examples are necessary to illustrate 
this possibility and the final regulations do not adopt this comment.
    Two commenters requested examples involving investments in low-
profit limited liability companies (L3Cs) or benefit corporations. On 
the other hand, one commenter approved of the lack of any examples 
suggesting the need for a recipient of a PRI to be an L3C or benefit 
corporation, noting that the IRS has not recognized L3C or benefit 
corporation status as relevant to the determination of whether an 
investment is a PRI and also noting potential concerns with and lack of 
universal endorsement of the L3C model. The proposed regulations 
included one example involving a loan to an LLC; the results of that 
example would be the same if the limited liability company described in 
the example were an L3C. Similarly, the results of examples in which 
the PRI recipient is a corporation would apply equally if the recipient 
were a benefit corporation. The Treasury Department and the IRS see no 
need to amend the examples to refer more narrowly to an L3C or benefit 
corporation when such status is not determinative of the examples' 
conclusions. Accordingly, the final regulations do not adopt these 
comments.
    One commenter noted that the example in the proposed regulations of 
a PRI financing medical research involved a disease that predominantly 
affects developing countries and requested another example involving a 
disease that affects developed countries (but with respect to which a 
lack of sufficient market incentives exist for research and development 
of new treatments). Scientific research carried

[[Page 24017]]

on for the purpose of discovering a cure for a disease need not involve 
a disease predominantly affecting developing countries to accomplish an 
exempt purpose described in section 501(c)(3). However, as previously 
noted, the PRI examples are intended to illustrate types of investments 
that qualify as PRIs and are not intended to address every circumstance 
that constitutes an exempt purpose, and thus the final regulations do 
not adopt this comment.
    Finally, one commenter requested additional guidance regarding the 
circumstances under which PRIs may result in impermissible private 
benefit and specifically requested an example of a PRI that has the 
primary purpose of benefitting indigent members of a charitable class 
but that also benefits non-indigent individuals (other than the 
recipient of the PRI itself). This commenter appeared to be requesting 
guidance on the circumstances under which private benefit conferred by 
an investment might affect an organization's exempt status under 
section 501(c)(3) rather than under which the private benefit might 
affect the investment's status as a PRI, and as such would be outside 
of the scope of these final regulations. The effect of private benefit 
on exempt status is addressed in examples in regulations under section 
501(c)(3) as well as a number of revenue rulings. See Sec.  
1.501(c)(3)-1(d)(1)(iii); Rev. Rul. 76-206, 1976-1 CB 154; Rev. Rul. 
74-587, 1974-2 CB 162; Rev. Rul. 70-186, 1970-1 CB 128. To the degree 
the commenter was requesting guidance on the effect of private benefit 
on an investment's status as a PRI, the substantial majority of 
examples in the existing and proposed regulations involve some private 
benefit to one or more persons that are not members of a charitable 
class (often including the recipient of the PRI itself) that is 
incidental to the investment's primary purpose of accomplishing an 
exempt purpose. As a result, the Treasury Department and the IRS do not 
believe that additional examples on this issue are necessary, and the 
final regulations do not adopt this comment

4. Procedures for the IRS to Rule on PRIs

    A number of commenters requested that the IRS adopt procedures that 
would allow private foundations considering a PRI to obtain 
determinations or guidance from the IRS regarding the PRI in ways that 
are more expeditious and less costly than the private letter ruling 
process.
    One commenter proposed that the IRS create a process similar to the 
one established under section 4945(g) for approving procedures for 
making grants to individuals. Under Sec.  53.4945-4(d)(3), if a 
foundation that properly submits a request for approval of grant 
procedures has not been notified by the IRS that its procedures are not 
acceptable by the 45th day after the submission, the procedures will be 
considered as approved from the date of submission until receipt of 
actual notice from the IRS that such procedures do not meet the 
necessary requirements. Section 4945(g) specifically requires that 
procedures for making grants to individuals be approved by the IRS to 
avoid an excise tax being applied to such grants. Section 4944 contains 
no such requirement of advance approval of PRIs and hence is not 
analogous to section 4945(g). Accordingly, the final regulations do not 
adopt this comment.
    One commenter recommended allowing private foundations to request 
determinations that their investments are PRIs using Form 8940, Request 
for Miscellaneous Determination, and also to request expedited review 
of such requests when the closing of financing of a PRI is scheduled 
four months or six months from the date the request is submitted. 
Determination requests that are submitted to Exempt Organizations 
Determinations using Form 8940 are listed in section 7.04 of Rev. Proc. 
2015-4 (2015-1 IRB 144). Allowing determination requests regarding PRIs 
to be submitted to Exempt Organizations Determinations using Form 8940 
(as well as expedited review of such requests) would require amendments 
to Rev. Proc. 2015-4, not the proposed regulations, and would require 
changes to tax administration programs. Hence it is outside the scope 
of these final regulations.
    Two commenters recommended allowing IRS private letter rulings 
(PLRs) regarding PRIs to be relied on by other private foundations, so 
that each private foundation investing in one project that qualifies as 
a PRI does not have to obtain its own PLR. We note that a PLR is not 
necessary for an investment to qualify as a PRI. Furthermore, allowing 
a private foundation to rely on a letter ruling issued to another 
taxpayer would require amendments to section 11 of Rev. Proc. 2015-1 
(2015-1 IRB 1), not the proposed regulations, and raises tax 
administration issues. Hence it is outside the scope of these final 
regulations.
    In addition to the changes noted above, the final regulations also 
correct the reference to section 4942 in Sec.  53.4944-3(a)(2)(ii) to 
reflect prior changes to that statute.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings notices, notices and other 
guidance cited in this preamble are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402, or by visiting the IRS Web site at http://www.irs.gov.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It has been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations, and because the regulation does not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Code, the NPRM preceding this regulation was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on business and no comments were received.

Drafting Information

    The principal author of these regulations is Robin Ehrenberg, 
Office of the Associate Chief Counsel (Tax Exempt and Government 
Entities). However, other personnel from the Treasury Department and 
the IRS participated in their development.

List of Subjects in 26 CFR Part 53

    Excise Taxes, Foundations, Investments, Lobbying, Reporting and 
Recordkeeping Requirements, Trusts and trustees.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 53 is amended as follows:

PART 53--FOUNDATION AND SIMILAR EXCISE TAXES

0
Par. 1. The authority citation for part 53 continues to read in part as 
follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. In Sec.  53.4944-3:

0
1. Amend paragraph (a)(2)(ii) by removing the language ``section 
4942(j)(5)(B)'' and adding in its place ``section 4942(j)(4)(B)''.

[[Page 24018]]


0
2. Amend paragraph (b) by adding Examples 11 through 19.

0
3. Add paragraph (c).
    The additions read as follows:


Sec.  53.4944-3  Exception for program-related investments.

* * * * *
    (b) * * *

    Example 11. X is a business enterprise that researches and 
develops new drugs. X's research demonstrates that a vaccine can be 
developed within ten years to prevent a disease that predominantly 
affects poor individuals in developing countries. However, neither X 
nor other commercial enterprises like X will devote their resources 
to develop the vaccine because the potential return on investment is 
significantly less than required by X or other commercial 
enterprises to undertake a project to develop new drugs. Y, a 
private foundation, enters into an investment agreement with X in 
order to induce X to develop the vaccine. Pursuant to the investment 
agreement, Y purchases shares of the common stock of S, a subsidiary 
corporation that X establishes to research and develop the vaccine. 
The agreement requires S to distribute the vaccine to poor 
individuals in developing countries at a price that is affordable to 
the affected population, although, the agreement does not preclude S 
from selling the vaccine to other individuals at a market rate. The 
agreement also requires S to publish the research results, 
disclosing substantially all information about the results that 
would be useful to the interested public. S agrees that the 
publication of its research results will be made as promptly after 
the completion of the research as is reasonably possible without 
jeopardizing S's right to secure patents necessary to protect its 
ownership or control of the results of the research. The expected 
rate of return on Y's investment in S is less than the expected 
market rate of return for an investment of similar risk. Y's primary 
purpose in making the investment is to fund scientific research in 
the public interest. No significant purpose of the investment 
involves the production of income or the appreciation of property. 
The investment significantly furthers the accomplishment of Y's 
exempt activities and would not have been made but for such 
relationship between the investment and Y's exempt activities. 
Accordingly, Y's purchase of the common stock of S is a program-
related investment.
    Example 12. Q, a developing country, produces a substantial 
amount of recyclable solid waste materials that are currently 
disposed of in landfills and by incineration, contributing 
significantly to environmental deterioration in Q. X is a new 
business enterprise located in Q. X's only activity will be 
collecting recyclable solid waste materials in Q and delivering 
those materials to recycling centers that are inaccessible to a 
majority of the population. If successful, the recycling collection 
business would prevent pollution in Q caused by the usual 
disposition of solid waste materials. X has obtained funding from 
only a few commercial investors who are concerned about the 
environmental impact of solid waste disposal. Although X made 
substantial efforts to procure additional funding, X has not been 
able to obtain sufficient funding because the expected rate of 
return is significantly less than the acceptable rate of return on 
an investment of this type. Because X has been unable to attract 
additional investors on the same terms as the initial investors, Y, 
a private foundation, enters into an investment agreement with X to 
purchase shares of X's common stock on the same terms as X's initial 
investors. Although there is a high risk associated with the 
investment in X, there is also the potential for a high rate of 
return if X is successful in the recycling business in Q. Y's 
primary purpose in making the investment is to combat environmental 
deterioration. No significant purpose of the investment involves the 
production of income or the appreciation of property. The investment 
significantly furthers the accomplishment of Y's exempt activities 
and would not have been made but for such relationship between the 
investment and Y's exempt activities. Accordingly, Y's purchase of 
the X common stock is a program-related investment.
    Example 13.  Assume the facts as stated in Example 12, except 
that X offers Y shares of X's common stock in order to induce Y to 
make a below-market rate loan to X. X previously made the same offer 
to a number of commercial investors. These investors were unwilling 
to provide loans to X on such terms because the expected return on 
the combined package of stock and debt was below the expected market 
return for such a package based on the level of risk involved, and 
they were also unwilling to provide loans on other terms X considers 
economically feasible. Y accepts the stock and makes the loan on the 
same terms that X offered to the commercial investors. Y's primary 
purpose in making the investment is to combat environmental 
deterioration. No significant purpose of the investment involves the 
production of income or the appreciation of property. The investment 
significantly furthers the accomplishment of Y's exempt activities 
and would not have been made but for such relationship between the 
investment and Y's exempt activities. Accordingly, the loan 
accompanied by the acceptance of common stock is a program-related 
investment.
    Example 14. X is a business enterprise located in V, a rural 
area in State Z. X employs a large number of poor individuals in V. 
A natural disaster occurs in V, causing significant damage to the 
area. The business operations of X are harmed because of damage to 
X's equipment and buildings. X has insufficient funds to continue 
its business operations and conventional sources of funds are 
unwilling or unable to provide loans to X on terms it considers 
economically feasible. In order to enable X to continue its business 
operations, Y, a private foundation, makes a loan to X bearing 
interest below the market rate for commercial loans of comparable 
risk. Y's primary purpose in making the loan is to provide relief to 
the poor and distressed. No significant purpose of the loan involves 
the production of income or the appreciation of property. The loan 
significantly furthers the accomplishment of Y's exempt activities 
and would not have been made but for such relationship between the 
loan and Y's exempt activities. Accordingly, the loan is a program-
related investment.
    Example 15.  Y, a private foundation, makes loans bearing 
interest below the market rate for commercial loans of comparable 
risk to poor individuals who live in W, a developing country, to 
enable them to start small businesses such as a roadside fruit 
stand. Conventional sources of funds were unwilling or unable to 
provide such loans on terms they consider economically feasible. Y's 
primary purpose in making the loans is to provide relief to the poor 
and distressed. No significant purpose of the loans involves the 
production of income or the appreciation of property. The loans 
significantly further the accomplishment of Y's exempt activities 
and would not have been made but for such relationship between the 
loans and Y's exempt activities. Accordingly, the loans to the poor 
individuals who live in W are program-related investments.
    Example 16.  X is a limited liability company treated as a 
partnership for federal income tax purposes. X purchases coffee from 
poor farmers residing in a developing country, either directly or 
through farmer-owned cooperatives. To fund the provision of 
efficient water management, crop cultivation, pest management, and 
farm management training to the poor farmers by X, Y, a private 
foundation, makes a loan to X bearing interest below the market rate 
for commercial loans of comparable risk. The loan agreement requires 
X to use the proceeds from the loan to provide the training to the 
poor farmers. X would not provide such training to the poor farmers 
absent the loan. Y's primary purpose in making the loan is to 
educate poor farmers about advanced agricultural methods. No 
significant purpose of the loan involves the production of income or 
the appreciation of property. The loan significantly furthers the 
accomplishment of Y's exempt activities and would not have been made 
but for such relationship between the loan and Y's exempt 
activities. Accordingly, the loan is a program-related investment.
    Example 17.  X is a social welfare organization that is 
recognized as an organization described in section 501(c)(4). X was 
formed to develop and encourage interest in painting, sculpture, and 
other art forms by, among other things, conducting weekly community 
art exhibits. X needs to purchase a large exhibition space to 
accommodate the demand for exhibition space within the community. 
Conventional sources of funds are unwilling or unable to provide 
funds to X on terms it considers economically feasible. Y, a private 
foundation, makes a loan to X at an interest rate below the market 
rate for commercial loans of comparable risk to fund the purchase of 
the new space. Y's primary purpose in making the loan is to promote 
the arts. No significant purpose of the loan involves the production 
of income or the appreciation of property. The loan significantly 
furthers the accomplishment of Y's exempt activities and would not 
have been made but for such

[[Page 24019]]

relationship between the loan and Y's exempt activities. 
Accordingly, the loan is a program-related investment.
    Example 18.  X is a non-profit corporation that provides child 
care services in a low-income neighborhood, enabling many residents 
of the neighborhood to be gainfully employed. X meets the 
requirements of section 501(k) and is recognized as an organization 
described in section 501(c)(3). X's current child care facility has 
reached capacity and has a long waiting list. X has determined that 
the demand for its services warrants the construction of a new child 
care facility in the same neighborhood. X is unable to obtain a loan 
from conventional sources of funds including B, a commercial bank 
because of X's credit record. Pursuant to a deposit agreement, Y, a 
private foundation, deposits $h in B, and B lends an identical 
amount to X to construct the new child care facility. The deposit 
agreement requires Y to keep $h on deposit with B during the term of 
X's loan and provides that if X defaults on the loan, B may deduct 
the amount of the default from the deposit. To facilitate B's access 
to the funds in the event of default, the agreement requires that 
the funds be invested in instruments that allow B to access them 
readily. The deposit agreement also provides that Y will earn 
interest at a rate of t% on the deposit. The t% rate is 
substantially less than Y could otherwise earn on this sum of money, 
if Y invested it elsewhere. The loan agreement between B and X 
requires X to use the proceeds from the loan to construct the new 
child care facility. Y's primary purpose in making the deposit is to 
further its educational purposes by enabling X to provide child care 
services within the meaning of section 501(k). No significant 
purpose of the deposit involves the production of income or the 
appreciation of property. The deposit significantly furthers the 
accomplishment of Y's exempt activities and would not have been made 
but for such relationship between the deposit and Y's exempt 
activities. Accordingly, the deposit is a program-related 
investment.
    Example 19.  Assume the same facts as stated in Example 18, 
except that instead of making a deposit of $h into B, Y enters into 
a guarantee agreement with B. The guarantee agreement provides that 
if X defaults on the loan, Y will repay the balance due on the loan 
to B. B was unwilling to make the loan to X in the absence of Y's 
guarantee. X must use the proceeds from the loan to construct the 
new child care facility. At the same time, X and Y enter into a 
reimbursement agreement whereby X agrees to reimburse Y for any and 
all amounts paid to B under the guarantee agreement. The signed 
guarantee and reimbursement agreements together constitute a 
``guarantee and reimbursement arrangement.'' Y's primary purpose in 
entering into the guarantee and reimbursement arrangement is to 
further Y's educational purposes. No significant purpose of the 
guarantee and reimbursement arrangement involves the production of 
income or the appreciation of property. The guarantee and 
reimbursement arrangement significantly furthers the accomplishment 
of Y's exempt activities and would not have been made but for such 
relationship between the guarantee and reimbursement arrangement and 
Y's exempt activities. Accordingly, the guarantee and reimbursement 
arrangement is a program-related investment.

    (c) Effective/applicability date. Paragraphs (a)(2)(ii) and (b), 
Examples 11 through 19 of this section, apply on or after April 25, 
2016.

 John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: April 5, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-09396 Filed 4-21-16; 4:15 pm]
 BILLING CODE 4830-01-P