A last minute addition to the budget appropriations bill enacted by Congress this month has created new opportunities for philanthropic planning. Section 41110 of the bill creates a limited exception from the private foundation excess business holdings excise tax under Section 4943 of the Internal Revenue Code.
In general, a private foundation is only permitted to hold certain amounts of stock or other interests in business enterprises; any holdings beyond those amounts are treated as excess business holdings, and the foundation will be subject to an excise tax on the value of such holdings.
The new law states that the excess business holdings tax does not apply with respect to holdings of a private foundation in any business enterprise for which (i) one hundred percent of the voting stock in the business enterprise is held by the private foundation at all times during the taxable year; (ii) all of the private foundation’s ownership interest in the business enterprise was acquired by means other than by purchase; (iii) the net operating income of the business enterprise is distributed to the private foundation on a yearly basis; and (iv) the business enterprise operates “independently” of the private foundation. The business enterprise is deemed to be operated independently if (a) no substantial contributor to the foundation (or their family member) serves as a director, officer, trustee, manager, employee or contractor of the business enterprise, (b) at least a majority of the private foundation’s board of directors are not directors or officers of the business enterprise or family members of a substantial contributor to the private foundation, and (c) there is no loan outstanding from the business enterprise to a substantial contributor to the private foundation (or a family member of a substantial contributor). The exception provided by the new law does not extend to donor advised funds and certain supporting organizations.
The new law is generally recognized to be the result of an active lobbying effort by the Newman’s Own Foundation, a private foundation established by the actor Paul Newman that wholly-owns a for-profit food company. Newman’s Own, which is known for its cookies, pasta sauces, and whimsical approach to advertising and product placement, was established by Paul Newman with the purpose of giving all of its profits to charity. When Newman died in 2008, he left the company to a private foundation which would have been subject to the Section 4943 excise tax without the passage of the new law. While spurred by Newman’s Own Foundation’s particular circumstances, this new exception could also provide a creative opportunity for ownership of business enterprises to be transferred by will to private foundations without ownership of such enterprises later being broken up to avoid the Section 4943 excise tax.