Do This But Not That
Charitable organizations are dependent, in no small part, upon the financial support of many successful business owners. The generosity of these individuals and their organizations may be a manifestation of several factors including, for example, their gratitude to the communities in which they have thrived, a willingness to share their good fortune for the benefit of others, and – less altruistically – a desire for public recognition[i] and the “incidental” benefits arising therefrom.[ii]
Whatever the motivation of these business owners, the Code has long played an important role in encouraging certain types of behavior relating to the contribution of property to charitable organizations by such owners and by similarly situated taxpayers.
Over the years, however, certain behaviors or tendencies have been identified among some individuals who support, or are otherwise involved in, a charitable organization’s activities, that may distract the charity from its mission or divert its assets toward non-charitable interests.
In response, the Code has sought to discourage specific activities that may have an adverse effect upon the charity, or that may improperly further the interests of private persons.[iii]
These tax-related “behavior modification” rules are intended to be most keenly felt by so-called “private foundations” (“PF”) and those who control them.
Private Foundations
A PF[iv] is a kind of charitable organization that is not dependent upon the “general public” for financial support;[v] rather, it is generally controlled by the individual,[vi] family, or business that created the organization, funds its operation, and determines the use or disposition of its assets.
Generally speaking, the typical PF limits its charitable activity to making monetary grants to those “public charities” selected by the PF’s board[vii] – usually comprised of the founder, members of their family, and maybe a close friend or trusted business colleague. These individuals also determine when to make a grant, the amount thereof and, of course, its charitable recipient. In some cases, the grant will be made for a specific purpose or project and, at times, a portion of the grant may be contingent upon the charitable recipient’s satisfaction of certain conditions or its attainment of a specific goal.
Because a PF derives its support and resources from a small circle of individuals, it may be presumed that the PF’s behavior cannot be readily influenced by the “public” in most instances because the public is not in a position to tighten the proverbial strings on the purse from which the PF is funded.
For that reason, the Code seeks to dissuade certain activities by a PF by threatening the imposition of penalties upon the offending PF and, in some cases, the members of its board.[viii]
From among these limiting provisions, the one with which many business owners should be concerned is the prohibition on excess business holdings.[ix]
The issue typically arises upon the death of the founder of the business, where their estate plan includes the transfer of an equity interest in a closely held business to an already existing PF[x] or to one to be formed under the terms of the founder’s will.
Business Holdings
Approximately 55 years ago, Congress observed what it decried as the increasing use of PFs by certain individuals[xi] to maintain control of their closely held businesses by transferring ownership of such businesses to their PFs.
Specifically, Congress considered the case of a business owner who would contribute a substantial ownership interest in their business to a PF, either during their life or at their death, thereby avoiding or reducing federal estate and gift taxes with respect to the value of such interest, while at the same time enabling the owner or their family to retain indirect control of the donated equity interest either through the PF.[xii]
Congress was concerned that a PF’s share of the business would become so substantial – i.e., it would exceed what Congress viewed as an appropriate level of “involvement” for a passive investment – that the noncharitable purpose of owning the business may eventually outweigh, and detract from, the PF’s charitable purpose.[xiii]
Business Enterprise
For these and similar reasons, Congress concluded that it had to limit the extent to which a business enterprise may be owned or controlled by a PF.
Before imposing such a limit, however, Congress first had to define the parameters of the activity to which the limit would be applied. In other words, what was the “business enterprise” the ownership of which was the object of Congress’s concern?
The term business enterprise, in general, includes the active conduct of a trade or business, including any activity that is regularly carried on for the production of income from the sale of goods or the performance of services, and that constitutes an unrelated trade or business as to the PF.[xiv]
The term does not include a functionally related business, or a “program-related investment,” which is part of the PF’s charitable program[xv] and where making a profit for the PF is not one of the significant purposes for holding the investment.
Congress also excluded from the term business enterprise a trade or business that obtains at least 95 percent of its gross income from passive sources;[xvi] for example, a passive holding company would not be considered a business holding, even if it is controlled by the PF, because passive investments are generally not considered business holdings.[xvii]
Having defined the nature of the business with respect to which Congress sought to limit a PF’s ownership, it then enacted the excess business holdings rules.
Before describing these rules, and to better appreciate their application, let’s first review the facts of a recent letter ruling issued by the IRS.[xviii]
Founder Bequeaths Equity to Foundation
Individual Founder owned membership interests in Company, a State limited liability company that was treated as a partnership for federal tax purposes. Over the years, Company evolved into a complex and diversified holding company with many different assets, including several subsidiary LLCs that owned and operated various real properties.[xix]
As part of his estate planning activities, Founder organized Foundation as a not-for-profit corporation under State law. Foundation applied for,[xx] and was granted, an exemption from federal income tax[xxi] as a charitable organization engaged in making grants to other charities.[xxii] Foundation was also classified as a private foundation.[xxiii]
After Founder’s demise, his estate transferred a one-third (33%) membership interest in Company to Foundation, which was the largest gift of a non-cash asset Foundation had ever received.
Presumably, Founder’s estate was entitled to claim a charitable deduction[xxiv] in respect of its transfer to Foundation for purposes of determining its federal estate tax liability.[xxv]
At the time of Founder’s death, his son – Son[xxvi] – held the remaining two-thirds membership interest in Company.
Thus, Foundation and Son owned 100 percent of Company following the death of Founder.
Having set the stage, let’s review the legislation that Congress enacted to address the ownership of closely held business interests by PFs similar to the situation just described, above.[xxvii]
Excess Business Holdings
The excess business holdings of a PF are the amount of stock or other interest in a business enterprise that exceeds the PF’s “permitted holdings” with respect to such business enterprise.[xxviii]
Stated differently, the term “excess business holdings” means, with respect to the holdings of any PF in any business enterprise, the amount of stock or other interest in the enterprise which the PF would have to dispose of to a person other than a disqualified person in order for the remaining holdings of the PF in such enterprise to be permitted holdings.[xxix]
Permitted Holdings
A PF is generally permitted to hold up to 20 percent of the voting stock[xxx] of a corporation, reduced by the percentage of voting stock actually or constructively owned by “disqualified persons” [xxxi] including, for example, a “substantial contributor” to the PF, a “foundation manager” (such as an officer or director of the PF), and a member of such contributor’s or such manager’s “family.”[xxxii]
There are two exceptions to this rule.[xxxiii]
Third Party Control
First, if one or more third persons, who are not disqualified persons, have “effective control” of a corporation, the PF and all disqualified persons together may own up to 35 percent of the corporation’s voting stock.
“Effective control” means the power, whether direct or indirect, and whether or not actually exercised, to direct or cause the direction of the management and policies of a business enterprise. It is the actual control which is decisive, and not its form or the means by which it is exercisable.[xxxiv]
De Minimis Holding
Under the second exception, a PF is not treated as having excess business holdings in any corporation in which it owns not more than two percent (2%) of the voting stock and not more than two percent of the value of all outstanding shares of all classes of stock of the corporation,[xxxv] regardless of how much stock is owned by the PF’s disqualified persons.
Non-Voting Stock
It should also be noted that nonvoting stock (or a capital interest for holdings in a partnership) is a permitted holding of a PF if all disqualified persons together hold no more than 20 percent (or 35 percent as described earlier) of the voting stock of the corporation.[xxxvi]
Attribution
For determining the holdings in a business enterprise of either a PF or a disqualified person, any stock or other interest owned directly or indirectly by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries.[xxxvii]
In making its computations, the PF must determine its proportionate interest and that of all disqualified persons in each class of stock, in relation to the proportion that the voting interest of each class has to all votes in the corporation.[xxxviii]
Disposition Within 90 Days
A PF that acquires excess business holdings, other than as a result of a purchase by the PF, will not be subject to the tax on excess business holdings if it disposes of the excess business holdings within 90 days from the date on which it knows, or has reason to know, of the event that caused it to have the excess holdings.
Similarly, a private foundation will not be subject to such tax because of its purchase of holdings where it did not know, or have reason to know of prior acquisitions by disqualified persons, but only if the foundation disposes of its excess holdings within the 90-day period described previously, and its purchase would not have created excess business holding but for such prior acquisitions by disqualified persons.
The amount of holdings the PF must dispose of during the 90-day period is not affected by disposals by disqualified persons during such period.[xxxix]
Five-Year Disposition Period
If there is a change in a PF’s holdings in a business enterprise (other than through purchase[xl] by the PF or by disqualified persons), such as through a gift or bequest, and the additional holdings cause the PF to have excess business holdings in the business enterprise, then the PF will have five years to reduce these holdings (or those of its disqualified persons) to permissible levels.[xli]
The excess business holdings resulting from the gift or bequest to the PF are treated as being held by a disqualified person, rather than by the PF itself, during the five-year period beginning on the date the PF obtains the holdings, which prevents the imposition of the tax on the PF’s excess holdings during such period while the PF attempts to reduce its holdings.[xlii]
The IRS may extend for an additional 5-year period the period for disposing of excess business holdings in the case of an unusually large gift or bequest of diverse business holdings or holdings with complex corporate structure.[xliii]
To qualify for an extension, the PF must establish that diligent efforts to dispose of such holdings have been made within the initial 5-year period, and disposition within such period has not been possible (except at a price substantially below fair market value) by reason of the size and complexity or diversity of such holdings.
In addition, prior to the close of the initial 5-year period, the PF must submit to the IRS a plan for disposing of all of the excess business holdings involved in the extension, and the PF also submits such plan to the Attorney General (or other appropriate State official) having administrative or supervisory authority or responsibility with respect to the PF’s disposition of the excess business holdings involved.[xliv]
The Tax
If the holdings of a PF and its disqualified persons exceed the permitted holdings, the PF must correct the situation so that its excess holdings are eliminated, such as by selling investments to reduce the holdings to the permitted level, or having disqualified persons dispose of their interests.[xlv]
Until the excess holdings are eliminated, the Code will impose an initial tax equal to 10 percent of the value of the excess business holdings of a PF in a business enterprise during any taxable year which ends during the taxable period.[xlvi]
If, at the close of the taxable period with respect to such business holdings, the PF still has excess business holdings in such enterprise, an additional tax is imposed equal to 200 percent of such excess business holdings.[xlvii]
If excess holdings arise other than from a purchase, such as through a gift or bequest of stock,[xlviii] the owners have five years in which to dispose of the excess holdings before the tax may be imposed.[xlix]
With the foregoing in mind, let’s see how Foundation addressed its excess business holdings.
The IRS Ruling
From its inception, it appears that Foundation properly reported that its membership interest in Company constituted excess business holdings, and that the initial five-year period for disposing of those excess business holdings would expire on Date.
Foundation represented that it made diligent efforts to dispose of its interest in Company throughout the initial five-year period.
Foundation initially sought to sell its interest, but it soon realized that, because of Company’s size and complexity, it could not find a buyer that would pay for its non-controlling interest without a significant discount from the value of the underlying assets.
Consequently, Foundation, Company, and Son decided to liquidate Company in its entirety. During the remainder of the initial five-year period, Company liquidated most of its assets. All that remained were two of the separate real estate properties held by LLC.
Company actively marketed the remaining two real estate assets, engaging in advanced discussions with potential buyers, but various factors prevented finalizing both sales.
Rulings Requested
Prior to the end of the initial five-year period, Foundation requested a ruling from the IRS granting it an additional five-year period to dispose of its excess business holdings in Company. Foundation also submitted its plan of disposition to the State Attorney General.[l]
Foundation also sought confirmation that its interest in Company would not be taxed[li] during the extension period.
IRS’s Response
Based on the foregoing, the IRS determined that Foundation’s plan to dispose of its business holdings in Company could reasonably be expected to be carried out before the close of the extension period.
Accordingly, the IRS concluded that Foundation satisfied the requirements for an extension of an additional five years to dispose of the excess business holdings.
The IRS also decided that Foundation’s excess business holdings in Company would not be subject to tax if Foundation disposed of them before the close of the extension period.
What to Do?
The owner of a successful, closely held business will face some very difficult choices as they age,[lii] including the following:
- Have they adopted a succession plan?
- If so, If necessary, how can they ensure the continued employment of trusted key employees?
- Should they make gifts of interests in the business to family members (or trusts for their benefit)?
- Should they sell the business?
- Should they hold it until their passing to secure a basis step-up[liii] in their ownership interest for their estate and, in the case of a tax partnership, in the estate’s share of the underlying assets of the business?[liv]
- How will their estate finance the payment of the federal and state estate taxes imposed with respect to the fair market value of their interest in the business?
- Do they[lv] have enough life insurance on their life to cover the anticipated estate tax?
- Is there a buy-sell agreement among the owners and the business and, if so, how is it funded?[lvi]
- Does the business own a policy on the owner’s life? Should it?[lvii]
- If the owner’s estate is eligible to do so, should it elect to pay these taxes in installments?[lviii]
- Does the estate or the business own real property that may be leveraged?[lix]
- Should the estate tax be deferred by leaving the business to their surviving spouse, perhaps in a trust that qualifies for the marital deduction?[lx]
- Should they consider leaving a portion of the business to a charity – probably a private foundation[lxi] “controlled” by their family – to reduce or eliminate the estate tax liability attributable to such portion?
Assume the owner, who is charitably inclined,[lxii] decides to pass a portion of their business to a private foundation. To facilitate this testamentary transfer, they organize the foundation while they are still living. They also revise their estate planning documents to reflect this decision.[lxiii]
Any Excess Business Holdings?
The foregoing transfer introduces the issues considered earlier in this post and places an additional burden on the executor of the deceased owner’s estate, initially, and then on the board of the foundation.
Let’s assume the business enterprise in question is treated as a C corporation for tax purposes. The ownership of stock in the business must be determined for both the foundation and all disqualified persons.[lxiv] Are there any excess business holdings?
Prior-year returns filed by the foundation (on IRS Form 990-PF) should be reviewed to see how such stock ownership was reported. Was there any underreporting to “avoid” raising excess business issues? Was any stock sold to disqualified persons, possibly resulting in an act of self-dealing?[lxv]
Assuming the acquisition of the stock will cause the foundation to have excess business holdings, must the foundation dispose of its excess holdings during the five-year period that begins when the stock is contributed to the foundation? To whom may the foundation sell the stock?
A corporation that is a disqualified person with respect to the foundation cannot redeem its shares from the foundation – an act of self-dealing – unless it offers to redeem stock from all the shareholders on the same terms and such terms provide for receipt by the foundation of no less than fair market value.[lxvi]
Alternatively, prior to transferring the stock to the foundation, can the decedent’s estate avoid the excess business holdings issue by taking advantage of the exception to self-dealing for transactions occurring during the administration of the estate?[lxvii]
Assuming there is no immediate excess business holdings issue, how can the foundation protect itself going forward?
Shortly after the close of each taxable year, and assuming the foundation owns stock in the corporation during the taxable year in excess of the 2 percent de minimis rule, the foundation should send to each foundation manager, substantial contributor, and any person holding more than a 20 percent interest in a substantial contributor, a questionnaire asking such persons to list all holdings, actual or constructive, in the corporation. The questionnaire should also ask each such person to list the holdings[lxviii] in the corporation of any persons who, because of their relationship to such disqualified person, were themselves disqualified persons.[lxix]
Other Concerns?
In addition to the excess business holdings issue, the foundation must consider how it will satisfy its annual distribution requirement[lxx] in the absence of dividends from the business. After all, many closely held businesses will pay reasonable compensation to shareholders who are also employed by the business, but will reinvest any profits rather than distribute them to the shareholders as dividends.
Having Fun Yet?
In light of the foregoing, a business owner should be very careful about leaving any of the business to a private foundation.
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The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.
[i] Adulation?
[ii] For better or worse, we can’t deny the admittedly selfish, and natural, desire to be publicly acknowledged or praised for having contributed to some charitable cause or organization. Not-for-profit organizations and their fundraisers try to exploit this human weakness on a daily basis as they solicit financial support from more affluent members of society. (“We’d love to honor you at our gala this year.”)
That said, I recall having read somewhere that, according to Maimonides (the great Jewish sage of the Middle Ages), anonymous philanthropy was the highest form of philanthropy – it eliminates the possibility, let alone the expectation, of a “quid pro quo relationship” between the donor and the recipient.
[iii] See the General Explanation of the Tax Reform Act of 1969, prepared by the Staff of the Joint Committee on Internal Revenue Taxation, December 3, 1970 (Joint Committee Explanation), for a good review.
[iv] The term “private foundation” is defined by the Code. A not-for-profit corporation or charitable trust formed under state law may be treated as a private foundation for tax purposes.
[v] Compare the public charity, the revenues of which come, by and large, from the general public (as contributions or as fees for services), including other charities and government. IRC Sec. 509(a).
[vi] At least so long as they are alive and competent.
[vii] Rather than providing any charitable service, itself.
[viii] See Subchapter A of Chapter 42 of the Code (IRC Sec. 4940 et seq.).
The Code also limits the tax benefits allowable to a foundation and its supporters, as compared to a public charity.
[ix] IRC Sec. 4943.
[x] I.e., one formed during the founder’s lifetime. The founder of a closely held business will rarely contribute their equity therein to a private foundation because the income tax deduction generated by such contribution is limited to the lower of the founder’s adjusted basis for the interest contributed or its fair market value. IRC Sec. 170(e)(1)(B)(ii).
That said, some owners have transferred interests to charitable remainder trusts in anticipation of selling the business. A discussion for another day.
[xi] Usually the founder of the business or members of their family.
[xii] Such control enabled the owner and/or their family to determine whether to make distributions to the owners of the business, including how much.
[xiii] In fact, Congress found that some foundations were not shy about using their economic power and tax-exempt status to acquire other business entities, and were less concerned about their charitable mission and with producing income to be used for charitable purposes. They were more interested in making the business successful and neglected what should have been their primary function of carrying on charitable activities.
According to the Joint Committee’s General Explanation of the Tax Reform Act of 1969, “[d]uring the consideration of then Tax Reform Act of 1969, a major newspaper carried the following advertisement: ‘Tax exempt organization will purchase companies earning $300,000 pre tax [sic.] at high earnings multiple. Immediate action.’” H.R. 13270 (Dec. 3, 1970), 91st Congress, P.L. 91-172.
See the Joint Committee’s General Explanation of the Tax Reform Act of 1969, H.R. 13270 (Dec. 3, 1970), 91st Congress, P.L. 91-172.
I suppose we shouldn’t be surprised that many “interested” persons testified against the limit on the ownership of businesses. For example, see the “Testimony to be Received Monday, September 8, 1969,” Committee on Finance, U.S. Senate, Tax Reform Act of 1969, H.R. 13270.
[xiv] Under IRC Sec. 513.
[xv] IRC Sec. 4943(d)(3)(A). For example, investments in small, inner city businesses to assist with neighborhood renovation.
[xvi] IRC Sec. 4943(d)(3); Reg. Sec. 53.4943-10(a)(1). See the unrelated business income tax rules at IRC Sec. 513 and Reg. Sec. 1.513-1(b).
[xvii] For example, where the foundation owns 100 percent of a company that owns real property that is triple net leased to an unrelated commercial tenant (say, a long-term lease with an Amazon fulfillment center).
[xviii] PLR 202503009.
[xix] These included a management company, an office building, a golf course, and many other real estate holdings.
[xx] Using IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3). IRC Sec. 508.
[xxi] Under IRC Sec. 501(a).
[xxii] Described in IRC Sec. 501(c)(3).
[xxiii] Under IRC Sec. 509.
[xxiv] IRC Sec. 2055. See Sch. O (Charitable, Public, and Similar Gifts and Bequests) of IRS Form 706.
Interestingly, the value of the business interest transferred to a charity will not necessarily be the same as its value included in the decedent’s gross estate. For example, the estate of a decedent who died owning 100% of a corporation may not be able to offset the value of the stock included in the gross estate where the decedent’s will disposed of the stock equally among three different charities because the value of the one-third interest received by each charity was discounted for lack of control. See Ahmanson Foundation v. U.S., 674 F.2d 761 (9th Cir. 1981). In other words, the amount of the charitable deduction is based upon the value of the interest actually received by the charity.
[xxv] Chapter 11 of the Code.
[xxvi] What, were you expecting a proper name?
Any John Wayne fans out there? Remember the dog’s name in the 1970s western, Big Jake? Dog.
[xxvii] IRC Sec. 4943(c).
[xxviii] A PF is not permitted any holdings in sole proprietorships that are business enterprises. Reg. Sec. 53.4943-3(c)(3).
[xxix] IRC Sec. 4943(c)(1).
For example, Corporation X has outstanding 100 shares of voting stock, with each share entitling the holder thereof to one vote. F, a private foundation, possesses 20 shares of X voting stock representing 20 percent of the voting power in X. Assume that the permitted holdings of F in X under paragraph (b)(1) of this section are 11 percent of the voting stock in X. F, therefore, possesses voting stock in X representing a percentage of voting stock in excess of the percentage permitted by such paragraph. Such excess percentage is 9 percent of the voting stock in X, determined by subtracting the percentage of voting stock representing the permitted holdings of F in X (i.e., 11 percent) from the percentage of voting stock held by F in X (I.E., 20 percent). (20% − 11% = 9%). The excess business holdings of F in X are an amount of voting stock representing such excess percentage, or 9 shares of X voting stock (9 percent of 100). Reg. 53.4943-3(a)(2).
[xxx] For purposes of IRC Sec. 4943, the percentage of voting stock held by any person in a corporation is normally determined by reference to the power of stock to vote for the election of directors, with treasury stock and stock which is authorized but unissued being disregarded. Reg. 53.4943-3(b)(1)(ii).
[xxxi] IRC Sec. 4943(c)(2)(A).
[xxxii] IRC Sec. 4946(a). Among the others included are the following: an owner of more than 20 percent of (a)the total combined voting power of a corporation, the profits interest of a partnership, or the beneficial interest of an unincorporated enterprise which is a substantial contributor to the foundation, (b) a member of the family of any individual described in the foregoing, a corporation of which such persons own more than 35 percent of the total combined voting power, and (c) a partnership in which such persons own more than 35 percent of the profits interest. Some of the foregoing terms are defined in IRC Sec. 4946.
[xxxiii] Another exception that is unlikely to apply to most any foundation is the so-called “Newman’s Own Exception” found in IRC Sec. 4943(g), which was enacted by the Bipartisan Budget Act of 2018. For a discussion of Newman’s Own and Newman’s Own Foundation, see https://www.taxslaw.com/2022/10/private-foundations-closely-held-businesses-and-distribution-requirements/.
[xxxiv] IRC Sec. 4943(c)(2)(B); Reg. Sec. 53.4943-3(b)(3).
[xxxv] IRC Sec. 4943(c)(2)(C).
[xxxvi] IRC Sec. 4943(c)(2)(A).
In the case of a partnership, “profits interest” shall be substituted for “voting stock”, and “capital interest” shall be substituted for “nonvoting stock.” Section 4943(c)(3). All equity interests which do not have voting power shall be classified as nonvoting stock. Reg. Sec. 53.4943-3(b)(2)(ii).
[xxxvii] IRC Sec. 4943(d)(1); Reg. Sec. 53.4943-8.
[xxxviii] For example, if the foundation owns 50 percent of the outstanding shares of a class of stock that has 60 percent of the voting rights in a corporation, the foundation’s holdings in the voting stock would be 30 percent.
[xxxix] Reg. Sec. 53.4943-2(a)(1)(ii) and (iii).
[xl] The term “purchase” shall not include any acquisition by gift, devise, bequest, legacy, or intestate succession. Reg. Sec. 53.4943-6(a)(2).
[xli] IRC Sec. 4943(c)(6).
[xlii] Reg. Sec. 53.4943-6(a)(1)(ii).
[xliii] IRC Sec. 4943(c)(7).
[xliv] IRC Sec. 4943(c)(7).
[xlv] Reg. Sec. 53.4943-9(c).
[xlvi] IRC Sec. 4943(a).
The term “taxable period” means, with respect to any excess business holdings of a private foundation in a business enterprise, the period beginning on the first day on which there are excess holdings and ending on the earlier of (a) the date of mailing of a notice of deficiency with respect to the tax imposed in respect of such holdings, (b) the date on which the excess is eliminated, or (c) the date on which such tax in respect of such holdings is assessed. IRC Sec. 4943(d)(2); Reg. Sec. 53.4943-9(a)(1).
[xlvii] IRC Sec. 4943(b).
[xlviii] Instances in which the PF did not initiate the acquisition.
[xlix] IRC Sec. 4943(c)(6); Reg. Sec. 53.4943-6(a)(1).
In the case of an acquisition of holdings in a business enterprise by a private foundation pursuant to the terms of a will or trust, the five-year period described in IRC Sec. 4943(c)(6) does not commence until the date on which the distribution of such holdings from the estate or trust to the foundation occurs. Reg. Sec. 53.4943-6(b)(1).
[l] The plan involved winding down Company following the disposition of the remaining two real estate properties held by LLC.
[li] Under IRC Sec. 4943(a) (1).
[lii] Or should I say mature? Ripen? Become more experienced?
[liii] IRC Sec. 1014.
[liv] IRC Sec. 754 and Sec. 743. See Reg. Sec. 1.742-1.
[lv] Preferably, in a life insurance trust, which may be structured so as not to be included in the insured owner’s gross estate. IRC Sec. 2042 and Sec. 2035.
[lvi] Take a look at IRC Sec. 2703 and the regulations issued under that provision.
[lvii] See Connelly v. U.S., 602 U.S. ___ (2024). Also: https://www.taxslaw.com/2024/06/funding-the-buyout-of-a-deceased-shareholder-with-corporate-owned-life-insurance-did-the-court-decide-connelly-correctly/#_edn1 .
[lviii] IRC Sec. 6166.
[lix] Estate of Graegin, T.C. Memo. 1988-477.
[lx] IRC Sec. 2056. Of course, if the surviving spouse or marital trust still owns the business at such spouse’s date of death, the value of the business will be included in the spouse’s gross estate.
[lxi] It is doubtful a public charity would accept an equity interest in the business without assurances that, in fairly short order, the business will be sold or the business will redeem the charity’s interest.
[lxii] If they are not so inclined, they should not be considering a transfer to charity merely for a tax benefit.
[lxiii] Query whether they decide to gift an interest in the business to the foundation.
Let’s assume the business is organized as a C corporation. The charity’s share of S corporation income is treated as unrelated business income. IRC Sec. 512(e). A charity that is a partner in a partnership, the trade or business of which is an unrelated trade or business with respect to the charity, must include its share of the partnership’s income in determining the charity’s unrelated business taxable income. IRC 512(c).
[lxiv] Of course, the latter must be identified.
[lxv] IRC Sec. 4941.
[lxvi] IRC Sec. 4941(d)(2)(F); Reg. Sec. 53.4941(d)-3(d).
[lxvii] See Reg. Sec. 53.4941(d)-1(b)(3).
[lxviii] Including constructive holdings.
[lxix] What if no response to the questionnaire is received? Send a second questionnaire? In such a case, the foundation may be found not to have reason to know of the acquisition of holdings by a disqualified person.
[lxx] IRC Sec. 4942.