Source: http://americansforcommunitydevelopment.org/frequently-asked-questions/
Timestamp: 2019-04-21 00:43:23+00:00

Document:
1. What is the L3C?
The L3C is the brand name for a hybrid structure that links business methods with charitable purposes in a for-profit entity organized to engage in socially beneficial activities. Because L3Cs build on the LLC foundation, the L3C offers a legal and commercial comfort level that stems from the successful experience investors, suppliers, and consumers have had with LLCs over the last generation. The creator, Robert Lang, calls the L3C the for profit with the non profit soul.
2. Are any L3C s already in operation?
Yes. The first bill to make the LC into law was signed by the Governor of Vermont on April 30, 2008. Since then, Illinois, Maine, Michigan, Utah, and Wyoming have passed an L3C law. The law in Maine will be effective July 1, 2011. The L3C bill has also been passed by two Indian nations – the Oglala Sioux and the Crow Indian Nation of Montana. As of May 2010 there have been approximately 180 L3C's formed.
3. How can I form an L3C?
To form an L3C, please visit the Secretary of State's Office in a state that has passed the L3C law for more information. You should also consult a licensed attorney. Depending on the state in which you form your L3C in, you may also need a Registered Agent. Also, if you are operating the L3C in a state other than where it was formed, you need to register as a foreign LLC.
4. What if my state has not yet adopted the L3C legislation?
Because the L3C is a variant form of LLC it can be qualified as a foreign LLC in a state that has not yet adopted the L3C. To register as a foreign LLC, please contact a licensed attorney or visit the Secretary of State's Office in your state for more information.
5. How does an L3C differ from a nonprofit charitable organization and how does it differ from a standard for-profit business?
An L3C is run like a regular business and may be profitable. Unlike a standard for-profit business, however, the primary aim of the L3C is not to make a profit, but to achieve socially beneficial purposes. Profit and the appreciation of capital are secondary and insignificant goals. The L3C thus occupies a unique niche between the for-profit and charitable sectors.
1. 1.	Can you provide examples of the sort of enterprise that might be organized as an L3C?
1) A hotel in a deteriorating business district would have some ability to generate revenue, but not enough to attract sufficient capital to begin operations.
2) Historic buildings could be preserved and converted into office and retail property, but the costs of renovation may be so steep that the projected rents can not support market-rate debt incurred to finance those renovations.
3) A factory that has employed much of a town’s work force may need to replace obsolete equipment at great cost, leading its owners to explore relocation of manufacturing operations to a lower-cost foreign jurisdiction.
4) A nonprofit hospital with unsustainable debt from significant charity care opts to reorganize as an L3C, with the primary benefit of continued care for paying and charity patients, but with the added empowerment of for profit business practices.
In all of these situations, an L3C could undertake the low-return, high-risk business activity involved in these situations, with a view to combating economic deterioration, destruction of historic property, or job loss.
We ask existing L3Cs to contact us so we may list your operation as an example here.
1. How will L3Cs attract the capital they need?
Attracting capital is the key to this innovative business vehicle. Under the federal tax laws, private foundations must distribute 5% of their capital each year for charitable purposes. Usually, foundations do this by making grants. However, foundations are permitted to make program-related investments (PRI) instead, and to count funds so invested in determining compliance with the five percent requirement.
The L3C vehicle is designed to attract PRI investments (although PRI investments from foundations are not a requirement. Under the L3C operating agreement, the foundation investor would have the last claim on the assets of the enterprise upon dissolution while accepting a rate of return well below the market rate. By absorbing excess risk and accepting less than market rate returns, the foundation investment provides a base of capital that makes the subsequent senior tiers of capital less risky and more profitable.
The most senior tier could generate market rates of return. With the PRI capital in place, the model L3C can potentially offer market rates of return at acceptable levels of risk to investors such as pension funds, community banks, etc.
2. Should foundations be undertaking capital-intensive, high risk joint ventures with for-profit partners?
PRIs were intended to facilitate joint investments by foundations and commercial interests in a way that accomplished charitable purposes, and have been permitted since 1969.
•	“Y, a private foundation, makes a high-risk investment in low-income housing…” Treas. Reg. §53.4944-3(b), Ex. (10). In fact, all of the Ex.s of approved PRIs in the Treasury Regulations involve risk levels that are unacceptable to normal financial investors, and all of the examples involve highly capital intensive projects such as the construction of manufacturing plants and low-income housing.
Moreover, current economic conditions suggest a need for greater deployment of foundation funds in PRIs in order to help alleviate economic and social distress.
1.How would an L3C be taxed?
In the same way as an LLC is taxed. The L3C may elect pass through status. No federal income tax is imposed on the entity itself unless it elects to be treated as a corporation. Instead, items of income and expense are allocated among the members of the L3C and reported on their returns as the income is earned. It is important to note that, although the L3C serves charitable ends, it is not exempt from taxation. Though L3C's by their nature begin as enterprises that are expected to generate low overall profits, if those businesses generate profits, those profits would be subject to taxation at the rates of tax that apply to their investors. Non profits would usually pay no tax.
2. Are investments in an L3C tax deductible?
No. The L3C is a for-profit entity and investments in an L3C are not deductible. While the L3C is designed to facilitate PRIs by foundations, these investments are governed by the rules governing PRIs rather than the rules governing charitable contributions.
3. Does it matter for federal income tax purposes whether an L3C is considered a charitable or non-charitable entity under state law?
• First, the draft federal legislation creates a new oversight and approval process at the IRS that enables entities seeking to receive PRIs (such as L3C's) to request an IRS determination that foundation investments in the entity will qualify as PRIs. Once an entity has received an IRS determination that it qualifies as a PRI recipient, foundations would be entitled to rely on the determination when making PRIs. Although the proposed determination process, like the current private letter ruling process, is not mandatory, we believe that L3C's and other PRI-seeking entities will voluntarily seek IRS review andapproval because foundations will be more likely to make PRIs in entities that have been approved by the IRS as PRI-qualified.
• Second, the draft federal legislation creates a mandatory reporting requirement for entities that receive PRIs where none currently exists.
• Finally, the federal legislation does not relieve foundations from their existing obligation to exercise due diligence and expenditure responsibility when making PRIs that have not been reviewed in advance by the IRS.
Additionally, the proposed federal legislation should assist state regulators in exercising their oversight function. State regulators, if they desired, could require L3Cs to submit copies of their IRS determination and information return, much as some states require charities to provide copies of their IRS determination letters and Forms 990. Thus, rather than increasing the burden on state regulators, the federal legislation should increase the transparency of the PRI process and the accountability of organizations that receive charitable funding, thereby facilitating regulatory oversight.
4. Would the IRS require L3Cs that are not single-owner entities to file separate returns as partnerships or corporations?
IRS generally draws on these criteria when evaluating whether jobs creation and economic development activities qualify as “charitable” under § 501(c)(3) of the Code.
Although some of the individuals receiving financial assistance in their business endeavors under the organization's program may not themselves qualify for charitable assistance as such, that fact does not detract from the charitable character of the organization's program. The recipients of loans and working capital in such cases are merely the instruments by which the charitable purposes are sought to be accomplished.
Thus, even though the organization did not provide financial support directly to members of a traditional charitable class, its activities still were deemed “charitable” since they benefited the disadvantaged community as a whole. It is worth noting that the preceding IRS rulings have been in place and operating as effective guidance for more than 35 years.
5. Are there any proposed reporting and disclosure requirements that would facilitate the verification of, compliance with L3C requirements and state oversight over charitable organizations and assets? Is there any other current method for the IRS, the states and the public to receive L3C-specific information from a charitable investor?
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.
6. Are special conflict of interest prohibitions necessary, such as a prohibition on participation in a for-profit investment in an L3C by persons related to the managers of the private foundation making the PRI?
Sections 4941 or 4958 of the Code, which respectively impose penalty taxes on self-dealing transactions by private foundations and excess benefit transactions by § 501(c)(3) organizations other than private foundations and § 501(c)(4) organizations, provide a remedy in such situations. Accordingly, the existing Code provisions already provide the necessary protections.
7. Is the IRS studying the issue to determine the tax consequences of L3Cs?
The L3C legislation at the state level provides the initial basis for state regulatory oversight by creating a mechanism—that is, the “L3C” designation—through which to identify the organizations. Currently, state regulators have no systematic way to even identify commercial entities with a charitable purpose, much less to develop legally sustainable procedures for reviewing them.
Such oversight procedures would be most effectively addressed through the legislative process; however, under current law, L3C entities may be required to register with state regulators in some states on the grounds that the entities are making “charitable appeals.” Certainly, the public information return requirement set out in the proposed federal legislation would provide a substantial amount of organizational and operational information to assist both federal and state regulators in addressing any inappropriate situations.
8. If a significant portion of an L3Cs capital is provided by investors seeking market rates of return, how can it be said that the production of income is not a significant purpose of the L3C?
purpose of the organization must be charitable, with the production of income permitted to be a secondary purpose. As with a tax-exempt charity that must have a charitable purpose by law, yet also must, from an economic standpoint, have sufficient revenue to conduct operations, institutional decisions must be made with the L3Cs overarching charitable purpose in mind. Thus, the L3C brings together foundations' PRIs and investments by nonexempt parties to accomplish L3Cs primary charitable purpose through a business that, because of its inherent risk and low likelihood of profit, simply would not be attractive solely to for-profit investors.
Precisely the same analytic framework that applies under current law to assess the purpose and fiscal operations of a tax exempt charity will apply to an L3C. When assessing whether a "significant purpose" of a foundation's proposed investment is the production of income for purposes of the PRI rules, Treas. Reg. § 53.4944-3(a)(2)(iii) states that is is "relevant whether investors solely engaged in he investment for profit would be likely to make the investment on the same terms as the private foundation." However the fact that an investment produces significant income or appreciation in the absence of other factors, is not conclusive evidence of a significant purpose involving the production of income or the appreciation of property. In fact, Treas. Reg. § 53.4944-3(b), Ex. 1, states, in analyzing an investment by foundation "Y," that the investment "is a program related investment even though Y may earn income from the investment in an amount comparable to or higher than earnings from conventional portfolio investments."
9. Does the state legislation allowing for the formation of L3Cs create an opportunity for foundations to circumvent the IRS rules?
Yes. The incorporation of the L3Cs concept into LLC statutes at the state level provides a consistent legal structure for socially beneficial enterprises and a means, through the “L3Cs” designation, for the public, regulators and grant-makers to identify them. Without such statutes in place, regulators would have no ability to identify such enterprises and determine whether or not they should register under state charitable solicitation rules or other regulatory regimes.
1. What safeguards and enforcement mechanisms are in place to ensure that L3Cs are not only organized for charitable purposes, but they also operate in a manner consistent with those purposes?
The L3C concept, if existing solely in state law, may not significant reduce the current transactional costs associated with a foundation making a PRI investment. Those transactional costs, primarily a result of current cumbersome and inefficient IRS administrative rulings procedures, inhibit foundations from employing their resources in socially-beneficial ways permitted under existing state and federal law. The proposed federal legislation directs the IRS to implement a process that will be a cost-efficient and far more effective process for screening proposed PRI investments.
2. How can one determine that the for-profit investors in the L3C venture are not receiving improper private benefit and that charitable purposes are being advanced through the L3C?
The IRS, state regulators, and private foundations would utilize the same oversight mechanisms currently used to evaluate and monitor existing PRIs. In addition, the oversight mechanisms proposed in the proposed federal legislation—the determination process and annual reporting requirement for PRI recipients (such as L3C's) —also could illuminate private benefit and self-dealing issues. Finally, if there were a change of circumstances whereby an L3C began to serve an illegal purpose or the private purpose of its managers, such entity would cease, under the terms of the state’s L3C statute, to qualify as an L3C and would cease, by operation of the federal tax law, to qualify as a PRI. In addition, it is important to remember that any foundation or charity investment in an L3C or other PRI is still governed by the restrictions in § 4941 of the Code, addressing self-dealing, or § 4958 of the Code, addressing excess benefit transactions.
3. Are there any mandatory provisions that would need to be included in L3C operating agreements to ensure that for-profit interests are subordinate to the company’s charitable purposes?
Neither federal nor state law imposes a maximum limitation on a foundation’s annual distributions. While both federal and state law prohibit a foundation from making investments that “jeopardize the carrying out of any of its exempt purposes they do not prohibit a foundation from investing any—or all—of its assets in PRIs, which, by definition, accomplish the carrying out of the foundation’s charitable purposes, and are specifically excepted from jeopardizing investment rules. Just as the current law permits a foundation to give away all of its assets in the form of grants, the current law also permits the foundation to invest those assets in PRIs.
4. Under what circumstances are economic development projects or job creation programs considered charitable under § 501(c)(3) of the Code?
Treas. Reg. § 1.501(c)(3)-1(d)(2) provides that the term “charitable” includes the promotion of social welfare by organizations designed to (1) lessen neighborhood tensions, (2) eliminate prejudice and discrimination, (3) combat community deterioration, or (4) combat juvenile delinquency. As the following examples illustrate, the IRS generally draws on these criteria when evaluating whether jobs creation and economic development activities qualify as “charitable” under § 501(c)(3) of the Code.
5. If a private foundation investor is required under the terms of an L3C operating agreement to cover any loss or a portion of a loss to for-profit investors seeking a “market return” on their investment, does this arrangement make the production of income a significant purpose? If a private foundation investor is required under the terms of an L3C operating agreement to make an additional capital investment, does this arrangement make the production of income a significant purpose?
The tax policy, which has been in place since 1969 and that underlies the concept of a PRI—namely, that private interests will benefit, but in the course of deriving that benefit, a far greater public benefit will be attained though the overarching charitable purpose of the PRI. Under federal tax law, such private benefit is deemed “incidental” and regularly occurs in many charitable relationships. For example, when a student receives a scholarship to attend college, the student receives a benefit that will result in life-long personal financial return, yet the act of granting the scholarship assistance is a traditional charitable act.
6. What are the factors that determine whether the production of income is a significant purpose?
For example, in Priv. Ltr Rul. 199910066, a private foundation interested in assisting in the revitalization of blighted communities entered into a limited partnership with a limited liability company as the general partner. The partnership raised funds to use as seed capital and first stage financing for start-up high technology ventures. Some of the companies in which the partnership invested would have been unable to obtain conventional financing. The funds invested by the foundation, as a limited partner, were used to invest in technology businesses that agreed to place their operations in areas of the community determined by a governmental body to be blighted or depressed. The companies had to agree that the investment could be redeemed or repaid if they failed to maintain operations in the community. Because these restrictions were imposed on the use of the foundation’s invested funds, the IRS concluded that the purpose of the investment was not the production of income or the appreciation of property and that the investment qualified as a PRI.
7. Given that L3Cs are intended to be predominantly charitable, how can state regulators be assured that they will have appropriate oversight over L3Cs?
8. Does the L3Cs designation increase the burden on state and federal regulators?
First, the draft federal legislation creates a new oversight and approval process at the IRS that enables entities seeking to receive PRIs (such as L3C's) to request an IRS determination that foundation investments in the entity will qualify as PRIs. Once an entity has received an IRS determination that it qualifies as a PRI recipient, foundations would be entitled to rely on the determination when making PRIs. Although the proposed determination process, like the current private letter ruling process, is not mandatory, we believe that L3C's and other PRI-seeking entities will voluntarily seek IRS review and approval because foundations will be more likely to make PRIs in entities that have been approved by the IRS as PRI-qualified.
Second, the draft federal legislation creates a mandatory reporting requirement for entities that receive PRIs where none currently exists.
Finally, the federal legislation does not relieve foundations from their existing obligation to exercise due diligence and expenditure responsibility when making PRIs that have not been reviewed in advance by the IRS.
Additionally, the proposed federal legislation should assist state regulators in exercising their oversight function. State< regulators, if they desired, could require L3Cs to submit copies of their IRS determination and information return, much as some states require charities to provide copies of their IRS determination letters and Forms 990. Thus, rather than increasing the burden on state regulators, the federal legislation should increase the transparency of the PRI process and the accountability of organizations that receive charitable funding, thereby facilitating regulatory oversight.
9. If there is no federal legislation or change in IRS policy concerning PRI and L3Cs, does state L3C legislation serve any purpose?
10. Would it be appropriate for a private foundation to invest in an L3C in which an officer or director had an ownership or other financial interest?
Section 4941 of the Code imposes tiered penalty excise taxes on each act of “self-dealing” between a disqualified person and a private foundation. Section 4946(a)(1) of the Code provides that a foundation’s “disqualified persons” include its substantial contributors, foundation managers, their family members (spouses, children, grandparents and grandchildren), and any entity that is more than 35% controlled by these individuals. Section 4941(d)(1) of the Code lists six transactions as acts of self-dealing, including a prohibition against the payment of compensation by a foundation to a disqualified person, unless the compensation is for “personal services which are reasonable and necessary to carrying out the exempt purpose of the private foundation,” and a broad catch-all prohibition against the transfer or use of foundation assets to it for the benefit of disqualified persons.
(2) disqualified persons may require the organization to take certain action solely by aggregating their votes or positions of authority with those of the foundation. Treas. Reg. § 53.4941(d)-1(b)(5).
Further, an organization will be considered to be controlled by a foundation or by a foundation and its disqualified person if they are able, in fact, to control the organization (even if they have less than 50% of the total voting power of the organization’s board of directors) or if either the foundation or one or more disqualified person has veto power over the potential self-dealing transaction.
investment partnership and the foundation could withdraw its investment on short notice).
In several of the rulings cited above, the entity (partnership, limited partnership, or LLC) in which the foundation and its disqualified persons co-invested was managed by a disqualified person of the foundation, and the disqualified person received a fee for providing management services. The IRS’s analysis of whether the management fees were a “payment of compensation . . by a private foundation to a disqualified person” and, thus, an act of self-dealing varied with the facts and circumstances of the management services arrangement.
concluded that there was no “direct or indirect payment of compensation” by the foundation, and thus no act of self-dealing.
any management and performance fees collected from the entity, to avoid any act of self-dealing. See Priv. Ltr. Rul.
considered an act of self-dealing under the exception described in § 4941(d)(2)(E).
Based on the foregoing, it stands to reason that a foundation’s valid PRI or portfolio investment in an L3C that is not 35% controlled by disqualified persons would not be considered an act of self-dealing, provided that the disqualified persons did not receive special benefits as a result of the foundation’s participation. Conversely, a foundation’s PRI or portfolio investment in an L3C that is 35% (or more) controlled by disqualified persons would raise self-dealing concerns. Thus, under certain circumstances, the Foundation, like all foundations, would be permitted to co-invest in an L3C together with its disqualified persons, provided that the Foundation’s investment did not confer a special benefit on its disqualified persons and provided that the L3C itself was not a disqualified person of the Foundation.
1. Will the L3C concept reduce transactional costs associated with PRI?
2. Will the promotion of L3Cs cause foundations to shift funds from existing grants and beneficiaries?
The decision whether to make a grant or a PRI is a “business” decision of the foundation, and neither form of charitable distribution is favored or disfavored over the other under either federal or state law; it is simply that grant-making is traditionally more common and thus more familiar to state regulators and the public. Whether a private foundation makes grants to charities or PRIs in L3Cs, charities, or other entities, the funds must be used to accomplish charitable purposes. If the PRI is in the form of a loan, the foundation eventually recovers its principal and perhaps earns interest. If the PRI is in the form of an equity investment, then the foundation may earn a return on that investment and eventually recover its capital contribution. Unlike a grant that is never recovered, PRIs may be repaid and then used by the foundation to make additional grants or PRIs. Thus, PRIs actually increase the funds available to accomplish charitable purposes over time.
Although it is impossible to project how foundations might array their charitable activities in the future, a significant shift away from grants is unlikely to occur, simply because of the traditional focus of many foundations on grant-oriented charity. However, this question suggests an economic analysis focused on a variation of “opportunity cost.” Viewed from that perspective, it may make more sense for a foundation to invest—rather than give away—its charitable funds because the foundation will be able to recover and redeploy the funds to accomplish additional charitable purposes in the future.
Foundations will be in the best position to determine whether their funds will have the most impact if granted or invested in a PRI. Based on the above considerations, if a foundation’s charitable portfolio consists of a thoughtful mix of grants and PRIs, the foundation could actually increase its funds available to accomplish charitable purposes over time.
3. While there is a minimum distribution requirement of 5%, is there any maximum distribution limitation?
Is there any prohibition against investing all the foundation’s assets in PRI? Neither federal nor state law imposes a maximum limitation on a foundation’s annual distributions. While both federal and state law prohibit a foundation from making investments that “jeopardize the carrying out of any of its exempt purposes they do not prohibit a foundation from investing any—or all—of its assets in PRIs, which, by definition, accomplish the carrying out of the foundation’s charitable purposes, and are specifically excepted from jeopardizing investment rules. Just as the current law permits a foundation to give away all of its assets in the form of grants, the current law also permits the foundation to invest those assets in PRIs.
4. What are the consequences for the foundation investors if it turns out the L3C was not properly structured to meet the IRS requirements for acceptable forms of PRI?
If the L3C failed to qualify as such because it was organized for a commercial purpose or had real profit potential, the foundation could retain its LLC interest as part of its portfolio.
If the L3C failed to qualify as such because it was organized to accomplish a political or legislative purpose described in §170(c)(2)(D) of the Code, then the foundation’s investment could be treated as a “taxable expenditure,” subjecting the foundation to penalty taxes under § 4945 of the Code.
Insofar as the L3C’s investors are concerned, if the L3C was not structured to qualify as such, the investors would be members in an LLC, rather than an L3C, and their investments would be treated in accordance with the LLC operating agreement.
5. Does the L3C designation relieve a foundation from its obligation to exercise due diligence?
6. Are L3Cs "state-created mechanisms" that encourage private foundations to make PRIs – as an alternative to grants?
The state L3C legislation does not create a new opportunity for foundations to make PRIs instead of grants. Foundations already utilize PRIs in LLCs, partnerships and corporations to accomplish charitable goals. However, these entities may not—and, under state law, generally are not required to—articulate a commitment to charitable purposes in their governing documents. By enacting legislation that recognizes the L3C, states are creating a business form with an identifiable designation—i.e., “L3C.” This designation signals to state and federal regulators that the entity is organized and operated to accomplish charitable or educational purposes, and regulators may implement programs or mechanisms to monitor whether these requirements are being met. Indeed, it is virtually impossible for regulators to identify taxable entities operating under a charitable purpose unless the organizations have been formed as L3C's. Thus, the state L3C legislation provides a new way for the public, the IRS, and state charity regulators to identify more easily organizations that seek charitable funding and purport to do charitable work.
1. Is this federal legislation really necessary?
PRIs have existed since 1969 and there are numerous examples in the Treasury Regulations and rulings of approved PRIs—including PRIs in traditional LLCs. Thus, as a technical matter, one could create the “effect” of an L3C by forming up an LLC and ensuring that its operating agreement and activities satisfy the requirements in Treas. Regs. § 53.4944-3. However, there would be no IRS screening mechanism or public information return filing requirement in the absence of the proposed federal legislation. These procedures would help ensure that foundation and charity investments in PRIs are appropriate and accomplish charitable purposes.
In addition, the proposed legislation is designed to help facilitate PRIs and, accordingly, the flow of capital from foundations to organizations providing charitable services to the community—a particularly important objective in the current economy. While the question assumes that foundations (in particular, “the big guys”) make significant PRIs, recent data reveal that the opposite may be true. According to a survey of more than 72,000 independent, corporate, operating, and community foundations, qualifying distributions in 2006 were approximately $43 billion. PRIs accounted for only $310.5 million (0.72%) of these qualifying distributions. (The Foundation Center, Aggregate Fiscal Data by Foundation Type, 2006 (published in 2008), available at http://foundationcenter.org/findfunders/statistics/pdf/01_found_fin_data/2006/02_06.pdf.) 88% of the 2006 PRIs were made by independent and corporate foundations. However, even for these organizations, PRIs accounted for only 0.81% of their total qualifying distributions. These statistics demonstrate that foundations of all sizes are simply not using the full array of tools available to them under federal and state law to accomplish their charitable missions, and, in particular, are not utilizing the PRI concept to enlist resources from the taxable sector to leverage charitable dollars in furtherance of those goals.
We are not aware of any statistics showing how many of these PRIs are made with, or without, out a private letter ruling; however, we note that all private letter rulings involving PRIs must be publicly released under § 6110 of the Code, and relatively few such rulings have been so released. According to our research, the IRS has released between 20 and 25 rulings addressing PRIs during the past 10 years.
We do understand, however, that the disproportionately low number of PRIs relative to grants is caused in part by foundations’ perception that the transaction costs associated with making PRIs are quite high. Given the fiduciary obligations imposed on foundation managers by state and federal laws, it is highly improbable that a foundation would deliberately avoid seeking a private letter ruling because it feared that its proposed investment would not be approved by the IRS as a PRI. It is far more likely that the time and expense associated with seeking a private letter ruling (time spent by counsel preparing the request, plus an $8,700 IRS user fee, plus a wait of up to a year to receive the ruling) deter foundations from making PRIs.
2. If there is no federal legislation or change in IRS policy concerning PRI and L3Cs, does state L3C legislation serve any purpose?
Yes. The incorporation of the L3C concept into LLC statutes at the state level provides a consistent legal structure for socially beneficial enterprises and a means, through the “L3C” designation, for the public, regulators and grant-makers to identify them. Without such statutes in place, regulators would have no ability to identify such enterprises and determine whether or not they should register under state charitable solicitation rules or other regulatory regimes.
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References: §53
 § 501
 § 501
 § 501
 § 53
 § 53
 § 4941
 § 4958
 § 501
 § 1
 § 501
 § 53
 § 4941
 §170
 § 4945
 § 53
 § 6110