CCA 200851070: A holding referral, passing on that excess business holdings rules may reach a supporting organization

Plain-English summary

Mostly a message about who will answer, with one piece of substance passed along second hand.

A supporting organization is a charity that qualifies by supporting another charity rather than by drawing broad public support of its own, and section 509(a)(3) is the provision it falls under. The writer says they have sent the question on to two colleagues who know that provision better than they do, which places this release among the handful in this batch that record a referral rather than an answer.

The substance is what one of those colleagues mentioned in passing. If the organization is a type 3 supporting organization under the Pension Protection Act of 2006, the interest in question will likely be subject to the excess business holdings provisions of section 4943, though it would still have five years to dispose of the interest. And section 4943 can reach type 1 and type 2 supporting organizations in certain circumstances as well.

The background makes the point legible. Excess business holdings rules limit how much of an operating business a private foundation may own, on the view that a charity should not be running a company on the side. Supporting organizations sat outside that regime until the Pension Protection Act of 2006, which extended it to type 3 organizations and, in defined circumstances, to types 1 and 2. The five-year disposal window matters just as much as the rule itself: an organization that comes to hold a business interest without buying it, typically by gift or bequest, is given time to sell rather than being taxed at once. So the answer the colleague gave is two-sided. The rules probably bite, and there is probably room to comply without a forced immediate sale.

The hedging should be read as it is written. The advice is reported at one remove, prefaced with what a colleague mentioned, and states the outcome as likely. It is conditional on a classification question that the release does not resolve, namely which type of supporting organization this is. The message ends by noting that a prior email is still unanswered, which confirms this is correspondence in progress rather than a considered position.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: the lower case "type 3" and "type 1 and 2"; the redaction dashes running into the following words in "colleagues -------------------and ----------------------who are"; and "will try to this week," where a word appears to be missing.

Ruling snapshot

• Question: Is an interest held by a section 509(a)(3) supporting organization subject to the excess business holdings rules?
• Outcome: Advice given, reported second hand and hedged. If the organization is a type 3 supporting organization under the Pension Protection Act of 2006, the interest likely will be subject to the section 4943 excess business holdings provisions, but would still have five years to dispose of the interest. Section 4943 can also apply to type 1 and type 2 supporting organizations in certain circumstances. The question was forwarded to colleagues more familiar with section 509(a)(3).
• Key authorities: IRC section 509(a)(3); IRC section 4943; the Pension Protection Act of 2006.

Full text (IRS public release)

ID: CCA_2008092207330553 Number: 200851070
Office: ----------------------------- Release Date: 12/19/2008

UILC: 509.02-02, 4943.00-00

From: -------------------------
Sent: Monday, September 22, 2008 7:33:08 AM
To: ----------------------
Cc: ------------------------------------------------------------------------ Subject: RE: 509(a)(3)

--------

I have forwarded this to my colleagues -------------------and ----------------------who are more familiar with section 509(a)(3) than I am. ----- mentioned that if this is a type 3 supporting organization under the Pension Protection Act of 2006, such an interest likely will be subject to section 4943 excess business holding provisions, but would still have 5 years to dispose of the interest. Also 4943 can apply to type 1 and 2 supporting organizations in certain circumstances. I still have to address your prior email and will try to this week.

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