Friday April 19, 2024

5.3.2 Exceptions to Excess Business Holdings

Exceptions to Excess Business Holdings

A Five Year Gift or Bequest:  Since it is quite possible that a private foundation (PF) or charitable remainder trust (CRT) will receive a transfer of stock or another interest in a family business, it is very helpful to have an exception that allows the CRT or PF to receive the business property and then sell within a reasonable time.

Further Extension of the Five Year Period:  However, there may be unique circumstances which make it impractical to transfer the business asset within the five year period.

A Five Year Gift or Bequest
Since it is quite possible that a private foundation (PF) or charitable remainder trust (CRT) will receive a transfer of stock or another interest in a family business, it is very helpful to have an exception that allows the CRT or PF to receive the business property and then sell within a reasonable time. If the transfer is by gift or bequest, then the CRT or PF will not be treated as holding the excess business asset for a period of five years after the date of the gift or bequest. Sec. 4943(c)(5).

This is particularly helpful, since many of the largest transfers to a CRT or PF are business entities. It may take a period of time to arrange the affairs of the business entity for sale and to locate an appropriate purchaser. Normally, the five year exception is a sufficient period of time to accomplish the sale of the business.

Further Extension of the Five Year Period
However, there may be unique circumstances which make it impractical to transfer the business asset within the five year period. Therefore, it may be possible to obtain permission from the IRS to have a period of greater than five years. In order to obtain this permission, the private foundation must show that it made diligent efforts to sell, and that it was not possible to sell at a fair price because of the size of the business or complexity of the business. In addition, a plan for the timing and nature of disposition must be filed with the IRS prior to the five year deadline. If the IRS determines that the plan is reasonable and the prospects for success are fairly good, then it may grant the additional time.

In PLR 200323045, a number of shares in a corporation were contributed to a private foundation. The private foundation began to sell the shares, since the donor was also the principal founder and stockholder of the corporation. However, as a result of the dramatic decline in prices of technology and other stocks during the year 2000, these particular shares declined significantly in value. Therefore, the foundation requested an additional five years for a total of ten years to dispose of the stock. Since the reason was deemed adequate and unforeseeable when the transfer was first made and the plan was a reasonable effort for disposing of the stock, the Service permitted the five year extension.

In PLR 200332020, fitness club real estate was transferred to a private foundation. Because the club required considerable upgrading and major capital improvements, the foundation requested additional time for the capital and technology improvements. The Service concluded that the foundation had made good faith efforts and needed more time to sell the club in a commercially appropriate manor.

Private Letter Rulings

PLR 200040037 Private Foundation Extension Of Excess Business Holdings Rules:   Donor X contributed shares of the family corporation Y to private foundation W. Subsequently, the assets of W were transferred to private foundation Z. Since the stock held by donor X and family members under the attribution rules exceeded 20% of total shares, the excess business holdings rules under Sec. 4943 apply. Shares held by a private foundation must under Sec. 4943(c)(6) be disposed of within a five-year period.

PLR 200323045 PF Granted Extra Five Years to Dispose of Excess Business Holdings:   In 1996 and 1997, Major Mark Stockholder contributed stock to My PF, which is classified as a private foundation. N, the contributed company stock, is a publicly traded company listed on the NASDAQ exchange. Major Mark actually owns the majority of the total outstanding stocks in N. In addition, Major Mark is a major contributor to My PF. As a result, Major Mark is a disqualified person with respect to My PF.

PLR 200332020 Foundation Is Given More Time to Dispose of Excess Business Holdings:   X, a private foundation, owns a significant amount of stock in Company. Company consisted of three different fitness clubs and adjacent real estate holdings. However, X has sold two of the clubs and has attempted to sell the third club. Although X has made diligent and continuous efforts to dispose of the third club, X has been unsuccessful.

PLR 200407024 Private Foundation Granted Additional Time to Dispose of Excess Business Holdings:   Frank Founder died and left his estate to his Foundation. Founder's estate included a 100% interest in a business, Fluorite Inc. Excise taxes are imposed on a private foundation that has excess business holdings. This rule is intended to prevent a foundation from holding large blocks of stock in family-run corporations in "friendly hands." An excess business holding results from a private foundation's ownership of more than 20% or 35% of the voting stock of a business (the applicable percentage depends upon the identity of the owners of other voting stock in the business). Because Foundation owns 100% of Fluorite Inc. stock, Foundation has excess business holdings.

PLR 201220037 Supporting ORG Allowed Additional Time to Dispose of Excess Business Holdings:   Organization ("SO") was formed as a charitable trust, recognized as tax-exempt under Sec. 501(c)3 and classified as a supporting organization under Sec. 509(a)(3) prior to the enactment of the Pension Protection Act of 2006 (the "Act").

PLR 201229011 Extension Granted to Dispose of Excess Business Holdings:   The sponsoring organization of several donor advised funds (DAFs), requested an extension of time to dispose of the excess business holdings in a family controlled corporation.

PLR 201303021 Private Foundation's Non-Voting Stock in Corporation Not Excess Business Holdings:   Foundation is a private foundation that is tax-exempt under Secs. 501(a) and 501(c)(3) of the Code. Founder, Wife and business entities they own have donated substantial sums of money to Foundation. As such, Founder, Wife and Corporation are substantial contributors to Foundation.
PLR 201636021 Foundation Receives Excess Business Holdings Extension:   Foundation received 100% of the stock of Company as beneficiary of Founder's revocable trust. Company owns a membership interest in several joint ventures related to Development Project.


Related Topics on Exceptions to Excess Business Holdings

5.3.1  Excess Business Holdings:    Competition between for-profits and nonprofits is a continual area of contention. For-profits are concerned that nonprofits compete by providing similar goods and services and yet are exempt from federal income taxes.

7.2.4  Excess Business Holdings:    A private foundation and disqualified persons' interests in a business or enterprise are limited. A private foundation and all disqualified persons are permitted to hold no more than 20% of a corporation's stock or business interest. The limit is 35% where a third person has effective control of the enterprise. For these provisions to apply, the private foundation must hold more than 2% of the business stock or interest. Sec. 4943(c)(2).

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