January 4, 2016

New IRS Guidance Clears the Way for “Mission-Related Investments” (MRIs)


MRIs allow foundations to pursue their nonprofit, philanthropic goals by making investments that pay dividends and benefit society or the environment. But until recently, many foundations were unsure if they could make such investments.

Foundations pursue their charitable goals mostly by making grants to organizations that address those goals. The money for the grants comes from charitable contributions and investment returns. The investments, under IRS rules, must be made with “ordinary business care and prudence” in providing for the foundation’s long- and short-term financial needs to carry out its charitable purposes. Foundations and foundation managers that fail to exercise such prudence may each face a tax equal to 5% of the investment.

It appears that this tax caused many foundations to think twice about investing in a for-profit business that pursues social and environmental goals (e.g., a company that makes recyclable packaging materials), but offered potentially lower rates of return than other investments.  A recent IRS notice clears the way for such investments, explaining that foundation managers are not limited to investments offering only the highest return rates, lowest risks, or most liquidity “so long as the foundation managers exercise the requisite ordinary business care and prudence under the facts and circumstances prevailing at the time of the investment . . . .”

The nonprofit State Science and Technology Institute believes the notice will stimulate “partnerships with forward-thinking venture development organizations and tech-based economic development initiatives.” As proof, it cites the Kresge Foundation’s recent announcement that it expects to increase its MRI portfolio to $350 million by 2020.