Private Foundations: Tax Law and Compliance, 4th Edition

Chapter EightJeopardizing Investments

1. § 8.1 General Rules
   1. (a) Defining Jeopardy
   2. (b) Donated Assets
2. § 8.2 Prudent Investments
   1. (a) Evaluating Investment Alternatives
   2. (b) Facing the Unknown
   3. (c) Risk versus Return
   4. (d) Total Return Investing
   5. (e) How Income Is Reported
   6. (f) Measuring Investment Return
3. § 8.3 Program-Related Investments
4. § 8.4 Investment Frauds
   1. (a) Background
   2. (b) NYSBA Report
5. § 8.5 Excise Taxes for Jeopardizing Investments
   1. (a) When a Manager Knows
   2. (b) Reliance on Outside Advisors
   3. (c) Removal from Jeopardy

A private foundation has limitations—albeit not particularly stringent ones—on its investment options. Basically, investments that jeopardize a foundation's corpus are not permitted. Investments of this nature are termed jeopardizing investments. The rationale underlying these rules was summarized as follows:

The grant of current tax benefits to donors and exempt organizations usually is justified on the basis that charity will benefit from the gifts. However, if the organization's assets are used in a way which jeopardizes their use for the organization's exempt purpose, this result is not obtained. Prior law recognized this concept in the case of income, but not in the case of an organization's principal.¹

Under prior law, a private foundation manager might invest the assets in warrants, commodity futures, and options, or might purchase on margin or otherwise expose the corpus of the foundation to risk of loss without being subject to sanction. (In one case, ...