The guidance recognizes that foundations are increasingly aligning their investment decisions with their charitable purposes, and clarifies that this alignment can be part of a prudent investment policy. Under Internal Revenue Code Section 4944 and its accompanying regulations, a private foundation investment is not considered “jeopardizing” if the foundation managers exercise ordinary business care and prudence in providing for the long-term and short-term financial needs of the foundation.
The new guidance clarifies that foundation managers are not limited to choosing investments that offer the highest rates of return, the lowest risks, or the most liquidity. They can consider “all relevant facts and circumstances” as long as they take careful and prudent steps to ensure their investment decisions support, not jeopardize, the foundation's charitable purposes. For example, the guidance states that:
“a private foundation will not be subject to tax under section 4944 if foundation managers who have exercised ordinary business care and prudence make an investment that furthers the foundation’s charitable purposes at an expected rate of return that is less than what the foundation might obtain from an investment that is unrelated to its charitable purposes.”
“The Council and our partners have long been calling for this kind of clarity from Treasury as foundations are increasingly looking to understand the rules governing MRIs. A growing movement of foundations who are using MRIs to leverage internal resources will likely be pleased by this new guidance,” states Council on Foundations President and CEO, Vikki Spruill, in reaction to this announcement.