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Jeopardizing Investments (IRC Section 4944)

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Jeopardizing Investments (IRC Section 4944)

Private foundations are prohibited from making investments that would jeopardize the foundation's ability to carry out its exempt purposes. There are many factors to be weighed when determining whether or not an investment is treated as "jeopardizing", but the Treasury Regulations state that foundation managers must exhibit "ordinary business care and prudence" at the time they make an investment with foundation funds and that they consider both the short and long-term financial needs of the foundation in doing so. Furthermore, no single type of investment is considered jeopardizing but the IRS does list a number of investment categories that will garner increased scrutiny including:

  • Commodity futures;
  • Trading on margin;
  • Short selling;
  • Purchasing puts, calls and straddles;
  • Buying warrants; and,
  • Investing in working interests in oil and gas wells.

There are a few exceptions to the tax on jeopardizing investments as follows:

  • Investments that are transferred to the foundation as a gift are exempt from the tax on jeopardizing investments unless the foundation provides any consideration to the person gifting the investment
  • If a private foundation acquires an investment as a result of a corporate reorganization, that investment is exempt from the tax
  • Program-related investments are also exempt from the tax

Amount of the tax:

  • An excise tax of 10% of the jeopardizing investment is imposed on the foundation for each year of the taxable period
  • An excise tax of 10% of the jeopardizing investment (up to a maximum of $10,000 for any one investment) is also imposed on any foundation manager who "knowingly, willfully and without reasonable cause" participated in the making of the investment for each year in the taxable period
  • If a foundation does not remove an investment from jeopardy within the taxable period, an additional tax of 25% of the jeopardizing investment is imposed on the foundation
  • If a foundation does not remove an investment from jeopardy within the taxable period, an additional tax of 10% (up to a maximum of $20,000 per investment) of the jeopardizing investment is imposed on any foundation manager who refuses to agree to all or part of the removal of the investment from jeopardy