The Bipartisan Budget Act of 2018, signed into law by President Donald Trump on Friday, February 9, 2018, resurrected an exception from the private foundation excess business holdings tax commonly referred to the “Newman’s Own” exception. The exception originally was included in the House Republicans’ draft of the Tax Cuts and Jobs Act in November 2017, but ultimately was not included in the final version of the Act passed in late December 2017. The exception has been sought for a number of years by the Newman’s Own Foundation, which owns 100 percent of a business that distributes all of its profits to the Foundation.
The exception, which is effective for taxable years beginning after December 31, 2017, generally provides that the tax on excess business holdings of a private foundation shall not apply to independently operated, philanthropic business holdings. In order for a foundation’s interest in a business to qualify for the exception, it must satisfy each of an “ownership,” “all profits to charity,” and “independent operation” requirement:
- Ownership. The ownership requirement is met if 100 percent of the voting stock of the business is held by the private foundation at all times during the tax year and all of the foundation’s ownership interest was acquired by means other than by purchase (e.g., by gift or bequest).
- All Profits to Charity. The all profits to charity requirement is met if the business, no later than 120 days after the close of the taxable year, distributes an amount equal to its net operating income (generally, gross income less allowable deductions, tax, and amount for reasonable reserves for working capital and other business needs) for such taxable year to the foundation.
- Independent Operation. The independent operation requirement generally is met if, at all times during the taxable year, (i) no substantial contributor to the foundation or a member of his or her family is a director, officer, trustee, manager, employee, or contractor of the business; (ii) at least a majority of the board of directors of the foundation are persons who are not directors or officers of the business or family members of a substantial contributor; and (iii) there is no loan outstanding from the business to a substantial contributor or any family member.
While presumably crafted to meet the specific circumstances of the Newman’s Own Foundation, the new exception may create planning opportunities for other private foundations and closely held businesses.