Thursday March 28, 2024

7.2.4 Excess Business Holdings

Excess Business Holdings

Exceptions to the Excess Business Holdings Rule:  The business holdings rule does not apply to a business in which 95% of the income is passive income.

Grace Period to Dispose of Excess Business Holdings:  If a private foundation acquires stock by gift or bequest that would cause it to violate the prohibition on excess business holdings, it has a five year grace period to dispose of the stock and comply with the excess business holdings rules.

Penalty for Excess Business Holdings:  For any period during which a foundation has excess business holdings, a 10% excise tax is imposed upon the value of the 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).

Exceptions to the Excess Business Holdings Rule


The business holdings rule does not apply to a business in which 95% of the income is passive income. Investments substantially related to achieving the organization's exempt purpose are generally exempt. The rule also does not apply to a business that is substantially carried on or related to the private foundation's exempt purpose, work for the private foundation provided without compensation, business provided for the benefit of employees and foundation merchandise sales.

Grace Period to Dispose of Excess Business Holdings


If a private foundation acquires stock by gift or bequest that would cause it to violate the prohibition on excess business holdings, it has a five year grace period to dispose of the stock and comply with the excess business holdings rules. Sec. 4943(c)(6). The IRS may extend the disposal period by five years for certain large and complex holdings. Sec. 4943(c)(7).

Penalty for Excess Business Holdings


For any period during which a foundation has excess business holdings, a 10% excise tax is imposed upon the value of the excess business holdings. If, the private foundation still has excess business holdings at the close of the tax period, a 200% excise tax is imposed on the value of such excess business holdings. Sec. 4943(a).

Example 7.2.4A

Private Foundation was given 15% of the voting stock of Fisher Corp. by a Donor. Susan, a substantial contributor to Private Foundation, owns 7% of the voting stock of Fisher Corp. Susan and Private Foundation's combined ownership of the voting stock of Fisher Corp. is 22%. Private Foundation therefore has excess business holdings because it is only permitted to own 20% of Fisher Corp's voting stock. Fisher Corp. must sell at least 2% of its Fisher Corp. voting stock to comply with the excess business holdings prohibition. Since Private Foundation received its Fisher Corp. voting stock as a gift, it has a five year grace period to complete the sale and dispose of its excess Fisher Corp. holdings.

Case Studies on Excess Business Holdings

Five Extra Years for Southern Brat Deli:   Peter and Sue Olson were raised in the great North Country. After college, they were married and Peter accepted a position with one of the nation's largest discount stores. He rose through the ranks and finally was promoted to be manager of the New Orleans branch of the store.

Lucky Lucy Lindstrom's Flood Recovery Plan:   Lucky Lucy Lindstrom finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor (RIA) and began advising clients. Lucy also managed her own investments. With her keen insight into financial markets, Lucy soon began to move from traditional stocks and bonds into futures and commodities markets. Lucy was so successful in these markets that she now only manages her own large personal portfolio. Somewhat late in life, Lucy discovered the wonderful world of philanthropy. She volunteered at her favorite charity and has learned that giving someone in need a helping hand is even more gratifying than making another million in the futures market. After reading in her favorite charity's weekly enewsletter about the need for housing in a low-income area that had been destroyed by a flood, Lucy called Clara Johnson, the charity's gift planner.

Lucy had invested $1,000,000 in stock in a renewable energy company with the name Northern Long Shot, Inc. This company designs and manufactures energy solutions for companies across the far north. Recently, the stock rose from the $1 per share that she paid to over $5 per share. Lucy thinks that this stock should be sold as soon as possible, but she would like to receive a deduction this year. In addition, she thought that the $5,000,000 could be placed in a private foundation to make loans to low-income individuals who otherwise could not afford to rebuild their homes. Since she wanted to have direct influence over the program, Lucy called her attorney Susan White to discuss a potential major gift to a private foundation for low-income housing loans.

Would this plan work? Can the private foundation receive the gift and sell the Northern Long Shot, Inc. stock? May the funds be used to offer housing loans to low-income individuals? Is there a better plan?
Lucky Lucy Lindstrom's "Northern Lite Shot" Charity:   Lucky Lucy Lindstrom finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor (RIA) and began advising clients.

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 200517031 Private Foundations May Create Real Estate:   Donor has created a private foundation M. Since Donor is a very successful real estate developer, he would like his private foundation to create an LLC to purchase land and then lease land to a second LLC to develop the property. His intent is for his private foundation M to use cash to purchase the land and then to lease it on a fixed payment lease to the Development LLC.

PLR 200526021 PF Permitted Five Year Extension to Dispose of Excess Business Holdings:   Bob Martin was the founder of Nimco, a complex and diversified real estate company. Nimco was the sole owner of Pimco. In his will, Bob bequeathed almost all of his estate to a marital trust. Clara, his wife, had a power of appointment over the marital trust. Bob and Clara also executed reciprocal will agreements under which both Bob and Clara agreed not to revoke or modify any term or provisions of their wills. Further they agreed that each of them would exercise their power of appointment in favor of the Martin Private Foundation.

PLR 200637041 Private Foundation's Real Estate Holdings Permitted:   A was formed as a private foundation as described in Sec. 509(a). A will hold a real estate portfolio consisting of commercial and residential rental properties.

PLR 200650018 Private Foundation Granted Extension to Dispose of Excess Business Holdings:   A is a private foundation as described in Sec. 509(a). A was created by B, who passed away leaving A his interest in a farm and 33% of the stock of C, which owns an irrigation ditch that runs through the Farm and adjacent land. The farm, irrigation ditch and land comprise a large and diverse business enterprise consisting of several thousand acres of farmland.

PLR 200747001 CLAT is a Completed Gift with No Excess Business Holdings:   Spouses H and W propose to create a charitable lead annuity trust (CLAT) to pay to a qualified public charity a fixed percent annually for the lesser of five years or the death of the second spouse.

PLR 201105053 Added Time to Sell Excess Business Holdings:   ORG is tax-exempt under Sec. 501(c)(3) and classified as a private foundation under Sec. 501(a). Upon the death of T, ORG received an unusually large bequest that resulted in ORG's ownership of 90% of M's class A common stock.
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 201333020 Foundation's Hedge Fund Interest Won't Result in Excise Tax:   Donor proposes to contribute all of her Class B membership interest in LLC to Foundation, a private foundation under Sec. 509. LLC's sole activity is the operation of an investment hedge fund.

PLR 201414031 Charitable Contributions Will Make Retained Shares Permitted Holdings:   Foundation is a tax-exempt organization under Sec. 501(c)(3) classified as a private foundation under Sec. 509(a). Foundation’s founders transferred 5.5% of Company’s shares to Foundation.

PLR 201422027 Foundation’s Operation of Apartments Not Excess Business Holdings:   ORG is a private operating foundation under 509(a)(1) of the Code. ORG was created pursuant to an irrevocable trust executed by Grantor to award and fund college scholarships.


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