Mission Matters Insights
What are Jeopardizing Investments?June 02, 2017
The IRS is on the lookout for private foundations using “jeopardizing investments”, or investments that will hinder the “carrying-out” of its exempt purpose. Read on....
Does your private foundation have jeopardizing investments? Investments are considered “jeopardizing” typically when they would financially jeopardize the “carrying-out” of a nonprofit organization’s exempt purpose.
What kinds of factors qualify investments as “jeopardizing” investments?
The IRS is looking out for those who knowingly make jeopardizing investments; however no single factor determines a jeopardizing investment. Foundation managers will be considered to have participated in making an investment that shows a lack of reasonable business care and prudence in providing for the foundation to carry out its exempt function knowingly only if:
- They have actual knowledge of the facts upon which the investment is based,
- They are aware that an investment under these circumstances may violate IRC 4944, and
- They fail to make reasonable attempts to learn whether the investment is a jeopardizing investment, or are simply aware that it is such an investment.
That being said, careful scrutiny is applied to....
- Trading in securities on margin
- Trading in commodity features
- Investing in working interests in oil and gas wells
- Buying “puts,” “calls” and “straddles”
- Buying warrants, and
- Selling short.
In determining whether the investment of an amount jeopardizes carrying out the exempt purposes, the entire foundation’s portfolio must be taken into account, and a determination must be made on an investment-by-investment basis.
Taxes on jeopardizing investments
- A 10% excise tax is imposed on the foundation for each year of the taxable period
- Any foundation manager who "knowingly, willfully and without reasonable cause" participated in the making of the investment for each year in the taxable period will incur an excise tax of 10% of the jeopardizing investment (up to a maximum of $10,000 for any one investment)
If the 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
- 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
To avoid the tax on jeopardizing investments, foundation managers must carefully analyze potential investments.
Instances where tax does not apply...
- Investments originally made by a person who later transferred them as gifts to the foundation. However, if the foundation gives any consideration on the transfer, the foundation will be treated as having made an investment in the amount of the consideration.
- Investments acquired by the foundation as a result of a corporate reorganization
- Program-related investments
An investment which threatens a foundation’s exempt purpose will be labeled “jeopardizing” at the time it’s made. Even if the investment later results in loss, if it was proper when made, it will not be considered a jeopardizing investment.
Think you might have a jeopardizing investment? Our Not-for-Profit services team can assist you.