The Rule That Sounds Strict But Isn't
When people hear "jeopardizing investments," they expect a list of banned assets — a clear set of things a private foundation isn't allowed to own. That's not how IRC §4944 works.
The statute doesn't prohibit any specific investment. It prohibits a specific failure: foundation managers making investment decisions without ordinary business care and prudence, considering the foundation's long-term and short-term financial needs. The asset class doesn't matter. What matters is whether the people making the decision exercised reasonable judgment when they made it.
That distinction sounds technical, but it changes how the rule actually operates. A foundation can hold hedge funds, private equity, even commodity futures — none of those are automatically off limits. What it cannot do is hold them without a documented, defensible reason that fits the foundation's overall financial picture.
This is one of the most misunderstood rules in foundation compliance, and it trips up new stewards more than it should. If you've recently inherited a foundation, or you're sitting on a board that's never thought hard about its investment policy, this is the rule that determines whether your portfolio is safe — or quietly exposing the foundation to excise tax.
What the Statute Actually Says
IRC §4944 imposes an excise tax on investments that "jeopardize the carrying out of the exempt purposes" of a private foundation. Treasury Regulation §53.4944-1 fills in the operative test:
An investment shall be considered to jeopardize the carrying out of the exempt purposes of a private foundation if it is determined that the foundation managers, in making such investment, have failed to exercise ordinary business care and prudence, under the facts and circumstances prevailing at the time of making the investment, in providing for the long- and short-term financial needs of the foundation to carry out its exempt purposes.
Three phrases do the heavy lifting:
"Ordinary business care and prudence" — this is essentially the prudent investor standard, the same standard that applies to fiduciaries under the Uniform Prudent Investor Act and most state trust laws. It's objective. The question isn't whether managers acted in good faith. It's whether a prudent investor in similar circumstances would have made a similar decision.
"At the time of making the investment" — the IRS does not get to look back from a future market crash and declare the investment imprudent in hindsight. Prudence is measured on the day the decision was made, with the information that existed then.
"Long- and short-term financial needs" — managers have to think about both. A foundation that puts everything in 30-year zero-coupon bonds is exposed if a major grant commitment is due next year. A foundation with no fixed income at all is exposed if equity markets fall and the 5% distribution requirement forces sales at a loss.
There Are No Per Se Prohibited Investments
This is the part most foundation stewards miss. The regulations explicitly say: "No category of investments shall be treated as a per se violation of section 4944."
You can own anything, in principle. What the regulations do is name a list of investment types that will be closely scrutinized if the IRS examines the foundation:
- Trading securities on margin
- Trading commodity futures
- Working interests in oil and gas wells
- Puts, calls, and straddles (options strategies)
- Warrants
- Selling short
The IRS has also signaled enhanced scrutiny for junk bonds, distressed real estate, risk arbitrage, hedge funds, complex derivatives, concentrated single-security positions, and emerging-market equities.
Being on the scrutiny list isn't the same as being prohibited. It means: if you hold these, the IRS expects you to be able to explain why holding them was prudent given the foundation's overall portfolio, its mission, its liquidity needs, and its time horizon. The documentation bar is higher. The investment itself is still allowed.
This is a useful reframe for boards that have been told "foundations can't own X." Usually that's wrong. What's true is: the foundation can own X, but the board needs a real investment policy and real meeting minutes showing they thought about it.
Investment-by-Investment, But In Portfolio Context
The regulation requires the jeopardy analysis to be made on an investment-by-investment basis — but each investment is evaluated in the context of the foundation's portfolio as a whole.
In practice this cuts both ways:
A volatile, high-risk position that would look reckless on its own can be entirely prudent as a 3% slice of a diversified portfolio. The foundation isn't exposed to the position's full risk because the rest of the portfolio absorbs it.
A seemingly conservative position can become jeopardizing if it represents excessive concentration. A foundation that has 80% of its assets in a single stock — even a blue-chip stock — is making a risky portfolio decision, regardless of how safe that one company looks. Concentration is risk.
This is why a written investment policy statement matters so much. The IPS is the document where the board declares its target allocation, its risk tolerance, its liquidity needs, and its diversification rules. When the IRS asks whether a specific investment was prudent, the IPS is the primary evidence that the board thought about portfolio-level risk before any individual position was bought.
If your foundation doesn't have an IPS, or hasn't reviewed the one it has in several years, that's the first thing to fix. It's also one of the items we address directly in a Foundation Governance Review.
The Time-of-Investment Rule Is a Real Protection
The "as of the time of making the investment" language in the regulation isn't ceremonial. It's a substantive protection for foundation managers.
The rule means: if the foundation bought a position on a date when the decision was reasonable, that investment is not jeopardizing — even if the market subsequently moves against it sharply. Losses don't retroactively make a prudent decision imprudent.
The corollary is that documentation has to exist at the time of the decision. A board that creates an investment rationale memo a year later, after an asset has dropped 60%, is not protected by the time-of-investment rule. The protection comes from contemporaneous evidence — minutes, IPS reviews, manager analyses, advisor recommendations — that the decision-making process was sound when it happened.
This is why we tell foundation clients to treat their board minutes as legal documents, not formalities. When the minutes show the board reviewed asset allocation, considered manager recommendations, and adopted a position consistent with the IPS, the §4944 question is essentially answered.
Penalty Structure
If the IRS does determine that an investment was jeopardizing, the penalty has two tiers.
Initial tax (§4944(a)):
- 10% of the amount involved, on the foundation, per taxable period
- 10% of the amount involved, on any foundation manager who knowingly and willfully participated without reasonable cause (capped at $10,000 per investment)
Additional tax (§4944(b)) — if the investment isn't removed from jeopardy within the correction period:
- 25% of the amount involved, on the foundation
- 5% of the amount involved, on any manager who refused to remove it (capped at $20,000 per investment per manager)
These aren't trivial numbers, but they're more proportionate than the self-dealing penalties, which scale to 200% in the second tier. The §4944 penalty assumes a real loss to the foundation; the self-dealing penalty assumes deliberate insider abuse. Different rules, different intensities.
The bigger risk for most foundations isn't a single jeopardizing investment — it's repeated patterns of unreviewed concentration or speculation that compound across multiple positions over multiple years. That kind of exposure rarely surfaces until a 990-PF audit triggers a closer look at the investment schedule.
Program-Related Investments Are Exempt
One exception is worth highlighting: Program-Related Investments (PRIs) are exempt from §4944 entirely under §4944(c).
A PRI is an investment whose primary purpose is accomplishing the foundation's exempt purposes — making low-interest loans to nonprofits, taking mission-aligned equity in social enterprises, guaranteeing loans for affordable housing — and for which no significant purpose is income or appreciation.
PRIs can look reckless from a pure investment standpoint. A 1% loan to a community development nonprofit isn't a market-rate investment. But because the primary purpose is charitable, the jeopardizing investment rules don't apply. PRIs also count toward the 5% distribution requirement, which makes them doubly useful for foundations that want to extend their impact beyond grants.
What This Means for Your Foundation
For most family foundations and inherited foundations, the §4944 question reduces to four practical items:
- Do you have a current written investment policy statement that reflects the foundation's actual situation — its size, its grant commitments, its time horizon?
- Are board meeting minutes documenting investment review at least annually, with real discussion of allocation and performance?
- If you hold anything on the scrutiny list (hedge funds, concentrated positions, derivatives), can you show why the position was prudent in portfolio context?
- Are investment managers properly engaged with documented fees, mandates, and reporting that lets the board exercise oversight?
If you can answer yes to all four, §4944 is not a meaningful risk for you. If any of those are weak or missing, that's where the exposure lives — not in the investments themselves, but in the absence of evidence that the board thought about them carefully.
We help foundations close those gaps through our Foundation Retainer and one-off Foundation Advisory Calls. Most §4944 problems are governance problems wearing investment clothing — they get solved by tightening up the IPS, the minutes, and the review cadence, not by selling holdings. If you're not sure where your foundation stands, a conversation is a good place to start.