The IRS established rules against excess business holdings intended to
keep private foundations from owning a significant stake in a family business.
Breaking those rules can have serious consequences for the foundation.
Excess Business Holdings Defined:
The excess business holdings of a foundation are the amount of stock or
other interest in a business enterprise that exceeds the permitted holdings.
A private foundation is generally permitted to hold up to 20 percent of
the voting stock of a corporation,
reduced by the percentage of voting stock actually or constructively owned
by disqualified persons. There are two exceptions to this rule.
1. If one or more third persons, who are not disqualified persons, have
effective control of a corporation, the private foundation 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
2. A private foundation is not treated as having excess business holdings
in any corporation in which it (together with certain other related private
foundations) owns not more than two percent of the voting stock and not
more than two percent of the value of all outstanding shares of all classes of stock.
Nonvoting stock (or capital interest for holdings in a partnership or joint
venture) is a permitted holding of a foundation if all disqualified persons
together hold no more than 20 percent (or 35 percent as described earlier)
of the voting stock of the corporation. All equity interests which are
not voting stock shall be classified as nonvoting stock.
Interest in sole proprietorships.
A private foundation is not permitted any holdings in sole proprietorships
that are business enterprises unless they were held before May 26, 1969
or acquired by gift or bequest thereafter.
Attribution of business holdings.
For determining the holdings in a business enterprise of either a private
foundation 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. (some exceptions apply, but are beyond the
scope of this post).
Example: A foundation manager of X Foundation, owns 50 percent of the stock
of Y Corporation. (Y Corporation is not actively engaged in a trade or
business.) Z Corporation is an 80 percent-owned subsidiary of Y Corporation.
Therefore, 40 percent of the Z Corporation stock is considered held by
a disqualified person to X Foundation. Any holding of more than two percent
of the voting stock or two percent of the value of the Z Corporation stock
will result in all of the Z Corporation stock held by the foundation being
treated as an excess business holding.
In making its computations, the foundation 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. 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.
Dispositions of certain excess holdings within 90 days.
A private foundation that acquires excess business holdings, other than
as a result of a purchase by the foundation, will not be subject to the
taxes 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. This
90–day period will be extended to include the period during which
a foundation is prevented by federal or state securities laws from disposing
of the excess business holdings. The 90–day disposition period applies,
for example, when a disqualified person acquires additional holdings.
The amount of holdings the foundation must dispose of is not affected
by disposals by disqualified persons during the 90–day period.
call the Perliski Law Group about other questions you have about your private family foundation.
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