PLR 201007066: IRS extended the period to dispose of a private foundation's excess business holdings

Plain-English summary

The IRS granted a private foundation an additional five years to dispose of stock it received as a donation and treated as excess business holdings. The foundation had tried to sell the holdings through real estate professionals and other contacts, but the IRS accepted that the property’s size, complexity, and the economic climate made a sale at fair market value impracticable during the initial period. The foundation submitted a plan for sale to the IRS and the state Attorney General, and the IRS determined that the plan could reasonably be completed during the extension. The ruling extended the disposition period through December 30, 2014, but did not rule on whether the holdings constituted excess business holdings.

Ruling snapshot

• Question: Could the private foundation receive an additional five years to dispose of its excess business holdings under IRC § 4943(c)(7)?
• Outcome: Approved, extension granted.
• Key authorities: IRC §§ 4943(c)(1), 4943(c)(2), 4943(c)(6), and 4943(c)(7); IRC § 501(c)(3); § 6110 disclosure provisions as discussed in the ruling.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201007066
Release Date: 2/19/10
Date: November 24, 2009

Uniform Issue List:
4943.04-01

SE:T:EO:RA:T:2

Legend:

Corporation =
Dear

This is in response to your ruling request dated July 20, 2009 requesting an extension for an
additional five years under section 4943(c)(7) of the Internal Revenue Code (“Code”) for
disposing of certain excess business holdings.

FACTS

You are a private foundation organized as a trust on December 30, 2004. You have been
recognized as an organization exempt under section 501(c)(3) of the Code and are classified as
a private foundation within the meaning of section 509(a). Your trust document states that your
beneficiaries are charitable, scientific and educational entities. You were initially funded with
1,000 shares of Corporation stock. The 1,000 shares represent a 100 percent interest in
Corporation. Prior to the donation of Corporation shares, your donor owned 100 percent of the
stock of Corporation. As a result of the contribution, your ownership interest constitutes excess
business holdings under section 4943(c)(1). Your initial five-year period for disposing of excess
business holdings ends on December 30, 2009.

You have been trying to dispose of your Corporation holdings since 2005. During the initial five-
year period for disposing of excess business holdings under section 4943(c)(6) of the Code, you
engaged the services of a prominent real estate agent to help sell your Corporation holdings.
The agent received offers for the purchase of the holdings; however, subsequent negotiations
never culminated in a written offer. Continued contact with several local realtors has confirmed
that there are no willing buyers for the property at this time. Also, the Foundation has contacted
and/or negotiated with several individuals regarding the disposition of the Corporation shares
with no success. The Foundation’s trustees attribute this to the current state of the economy, as
well as to the unique nature of the property.

Your represent that your real estate agent states that given the current economic climate, the
Corporation holdings could only be sold if the price were substantially below market value, and

your agent believes that a turnaround in this area will occur over the next two to three years.
Despite current economic conditions, ongoing development appears to be moving forward,
which you anticipate will boost the local economy over the next five years. Corporation has
significant value and the sale of an asset of this size will have significant consequences to you.
Because of the size, value, nature and complexity of this business holding, you have, despite
your representations that you have used best efforts, been unable to complete the sale of the
Corporation holdings within the prescribed five-year period.

Your trustees have established a plan of sale that includes: developing a comprehensive
brochure, developing local and direct contacts with investment management companies and
private equities firms, maintaining contact with top-selling realtors, contacting mobile home park
acquisition companies, increasing advertising in various mediums targeted to commercial real
estate investors, and listing the property on websites connected with this industry. Your
trustees expect that they can sell the property at a price not substantially below fair market
value no later than December 30, 2014. You submitted the plan to your state Attorney General
and are waiting for a response. If and when a response is received from the state Attorney
General, a copy will be submitted to the Secretary in accordance with section 4943(c)(7)(B)(ii) of
the Code.

Prior to the end of the initial five-year period for disposing of excess business holdings under
section 4943(c)(6) of the Code, you submitted a request to the Internal Revenue Service for an
extension of five years to complete the required disposition.

RULING REQUESTED

You requested a ruling extending the five-year period of time for disposing of excess business
holdings for an additional five years under section 4943(c)(7) of the Code.

LAW

Section 4943(a)(1) of the Code imposes excise taxes on the excess business holdings of any
private foundation in a business enterprise.

Section 4943(c)(1) of the Code provides that the term "excess business holdings" means, with
respect to the holdings of any private foundation in any business enterprise, the amount of stock
or other interest in the enterprise which the foundation would have to dispose of to a person
other than a disqualified person in order for the remaining holdings of the foundation in such
enterprise to be permitted holdings.

Section 4943(c)(2) of the Code provides in part that the permitted holdings of any private
foundation in an incorporated business enterprise are 20 percent of the voting stock, reduced by
the percentage of the voting stock owned by all disqualified persons.

Section 4943(c)(6)(A) of the Code provides that, if there is a change in the holdings in a
business enterprise (other than by purchase by the private foundation or by a disqualified
person) which causes the private foundation to have excess business holdings in such
enterprise, the interest of the foundation in such enterprise (immediately after such change)

shall (while held by the foundation) be treated as held by a disqualified person (rather than by
the foundation) during the 5-year period beginning on the date of such change in holdings.

Section 4943(c)(7) of the Code provides that the Internal Revenue Service may extend for an
additional five years the initial five-year 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 structures if:

(A) The foundation establishes that: (i) it made diligent efforts to dispose of such
holdings during the initial five-year period, and (ii) disposition within the initial five-year
period has not been possible (except at a price substantially below fair market value) by
reason of such size and complexity or diversity of holdings;

(B) Before the close of the initial five-year period: (i) the private foundation submits to the
Internal Revenue Service a plan for disposing of all of the excess business holdings
involved in the extension, and (ii) the private foundation submits the plan to the Attorney
General (or other appropriate State official) having administrative or supervisory
authority or responsibility with respect to the foundation's disposition of the excess
business holdings involved and submits to the Internal Revenue Service any response
the private foundation received during the five-year period; and

(C) The Internal Revenue Service determines that such plan can reasonably be
expected to be carried out before the close of the extension period.

ANALYSIS

You are subject to section 4943 of the Code, which imposes a tax on the excess business
holdings of private foundations. Generally, under section 4943(c)(2)(A), a private foundation is
permitted to hold twenty percent of the voting stock in a business enterprise with any excess
constituting excess business holdings. However, if a private foundation acquires holdings in a
business enterprise other than by purchase (e.g., by gift) which causes the foundation to have
excess business holdings, then the interest of the Foundation in such business enterprise shall
be treated as held by a disqualified person (rather than the Foundation) for a five-period
beginning on the date such holdings were acquired by the Foundation, under section
4943(c)(6)(A).

Under section 4943(c)(7) of the Code, the Internal Revenue Service may extend the initial five-
year period for disposing of excess business holdings for an additional five years if you establish
that: (i) you made diligent efforts to dispose of such holdings during the initial five-year period,
and disposition within the initial five-year period has not been possible (except at a price
substantially below fair market value) by reason of such size and complexity or diversity of
holdings, (ii) before the close of the initial five-year period you submit to the Internal Revenue
Service and Attorney General (or other appropriate State official) having administrative or
supervisory authority or responsibility with respect to the foundation's disposition of the excess
business holdings involved a plan for disposing of all of the excess business holdings involved
during the extension and (iii) the Internal Revenue Service determines that such plan can
reasonably be expected to be carried out before the close of the extension period.

You received a donation of 100% of the shares of Corporation from your donor, a disqualified
person under section 4946 of the Code. You have stated that because you own more than 20
percent of Corporation's holdings, the holdings of Corporation that you own constitute excess
business holdings under section 4943(c)(1). Therefore, you are required under section
4943(c)(6) to dispose of these holdings during the initial five-year period ending on December
30 2009. During the initial five-year period, as required by section 4943(c)(7)(A)(i) of the Code,
you made diligent efforts to dispose of the Corporation holdings. You hired a prominent and
experienced local real estate broker who listed and actively marketed the property, and
continues to do so. However, due to the unique nature of the holdings owned by the
Corporation, and the current economic climate, you are unable to dispose of the Corporation
holdings. You represented that disposition of the Corporation holdings within the initial five-year
period is not possible, except at a price substantially below fair market value, as required by
section 4943(c)(7)(A)(ii). Before the end of the initial five-year period, you submitted a request
to the Internal Revenue Service under section 4943(c)(7) for an additional five-year period
within which to dispose of your Corporation holdings and you described your plan for disposing
of Corporation holdings. You also submitted the plan to the Attorney General of your state, who
is expected to approve the plan. Thus, based on the information submitted, we have
determined that your plan to dispose of all of your Corporation holdings within an additional five-
year period can reasonably be expected to be carried out. Therefore, we conclude that you
meet the requirements under section 4943(c)(7) of the Code for an extension of five years to
dispose of your Corporation holdings.

RULING

Under section 4943(c)(7) of the Code, the period during which you may dispose of your
Corporation holdings is extended an additional five years, until December 30, 2014.

We are not ruling on whether your interest in the Corporation constitutes excess business
holdings.

This ruling will be made available for public inspection under section 6110 of the Code after
certain deletions of identifying information are made. For details, see enclosed Notice 437,
Notice of Intention to Disclose. A copy of this ruling with deletions that we intend to make
available for public inspection is attached to Notice 437. If you disagree with our proposed
deletions, you should follow the instructions in Notice 437.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the Code
provides that it may not be used or cited by others as precedent.

This ruling is based on the facts as they were presented and on the understanding that there will
be no material changes in these facts. This ruling does not address the applicability of any
section of the Code or regulations to the facts submitted other than with respect to the sections
described. Because it could help resolve questions concerning your federal income tax status,
this ruling should be kept in your permanent records.

If you have any questions about this ruling, please contact the person whose name and
telephone number are shown in the heading of this letter.

In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we
are sending a copy of this letter to your authorized representative.

Sincerely,

Ronald Shoemaker
Manager, Exempt Organizations
Technical Group 2

Enclosure
Notice 437