The proposed federal legislation provides for a voluntary process wherein an entity seeking to receive PRIs (e.g., an L³C) may request an IRS determination that foundation investments in the entity will qualify as PRIs. This process is analogous to the IRS determination process for entities seeking to qualify as tax-exempt under § 501(c)(3) of the Code and should ensure that the structure and proposed activities of the entity comply with the PRI requirements. In addition, the proposed federal legislation requires each PRI-qualified entity that has received an IRS determination to file an information return with the IRS for any taxable year in which it receives or retains one or more PRIs. The return must contain the following information about the entity:

• its gross income for the year;
• its expenses attributable to such income incurred within the year; • its disbursements within the year for the exempt purposes of organizations holding PRIs in the entity, together with a narrative statement describing the results obtained from the use of those assets for charitable purposes;
• a balance sheet showing its assets, liabilities, and net worth as of the beginning of such year;
• a statement of the portion of its liabilities and net worth that represent capitalization obtained by means of program-related investments as of the beginning of such year;
• a statement of any interest, dividends, or other distributions paid with respect to any program-related investments during the year; and
• any other information that the IRS may require.

This information, together with the information disclosed on the foundations’ Forms 990-PF, should enable the IRS to verify an L³Cs compliance with the PRI requirements and facilitate oversight over the entity by state regulators. Thus, the proposed federal legislation provides a mechanism for regulatory oversight of PRI recipients where none currently exists. Aside from the Form 990 and Form 990-PF disclosures the IRS does not currently have another method for tracking information concerning PRIs in any entity. Further, absent a congressional amendment to the Code, the IRS could not publicly disclose – or require an L³C to disclose – the L³Cs partnership or corporate tax filings.

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