Private foundation: "Jeopardizing investments" defined


Jeopardizing investments generally are investments that show a lack of reasonable business care and prudence in providing for the long- and short-term financial needs of the foundation for it to carry out its exempt function. No single factor determines a jeopardizing investment.

No category of investments is treated as an intrinsic violation, but careful scrutiny is applied to:

  1. Trading in securities on margin,
  2. Trading in commodity futures,
  3. Investing in working interests in oil and gas wells,
  4. Buying puts, calls, and straddles,
  5. Buying warrants, and
  6. Selling short.

In deciding whether the investment of an amount jeopardizes carrying out the exempt purposes, a determination must be made on an investment-by-investment basis taking into account the foundation's portfolio as a whole.  The foundation managers may take into account expected returns, risks of rising and falling prices, and the need for diversification within the investment portfolio.  To avoid the tax on jeopardizing investments, foundation managers must carefully analyze potential investments and exercise good business judgment.

Whether an investment jeopardizes the foundation's exempt purposes is determined at the time the investment is made.  If the investment was proper when made, it will not be considered a jeopardizing investment even if it later results in loss.

These rules do not relieve any person from complying with any federal or state law imposing any obligation, duty, responsibility or other standard of conduct on the operation or administration of an organization or trust.  Nor shall any state law exempt or relieve any person from any standard of conduct provided in these rules.

The tax on jeopardizing investments does not apply to investments originally made by a person who later transferred them as gifts to the foundation.  However, if the person receives any consideration from the foundation on the transfer, the foundation will be treated as having made an investment in the amount of the consideration.

The tax on jeopardizing investments does not apply to investments acquired by the foundation as a result of a corporate reorganization nor does the tax apply to investments made before 1970 unless the form or terms of the investments are later changed, or they are exchanged for other investments.

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