PLR 1236032: Private foundation receives five more years to dispose of excess business holdings

Plain-English summary

The IRS granted a private foundation an additional five years to dispose of excess business holdings received through a QTIP trust. The foundation had sold most of the holdings but still owned a real estate development company whose assets had not been sold because of market conditions and the size and complexity of the property. The foundation planned to contribute the company to an educational institution, sell its assets or stock if that failed, or conduct an auction before the extension expired. The IRS also ruled that the five-year disposal period began when the QTIP trust assets were distributed to the foundation.

Ruling snapshot

• Question: When did the foundation’s section 4943(c)(6) disposal period begin, and could it receive an additional five-year extension?
• Outcome: Approved, additional five-year extension granted
• Key authorities: IRC §§ 4943(a)(1), 4943(c)(1), 4943(c)(6), 4943(c)(7), 501(c)(3), and 6110; Treas. Reg. §§ 1.641(b)-3(b), 53.4943-5(b)(1), and 53.4943-6(b)(1)

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201236032 Contact Person:

Release Date: 9/7/2012
Identification Number:

Date: June 14, 2012
Telephone Number:

Employer Identification Number:

Section 4943 — Excise Taxes on Excess Business Holdings
4943.00-00 Excise Taxes on Excess Business Holdings

Section 501 — Exemption From Tax on Corporations, Certain Trusts, etc.
501.00-00 Exemption From Tax on Corporations, Certain Trusts, etc. (Exempt v. Not Exempt)

LEGEND:

Decedent A =
Decedent B =

Foundation =

School =

Court =
State =

Company =

Date 1 =
Date 2 =
Date 3 =
Date 4 =
Date 5 =
Date 6 =

Year =

Dear ,

This is in response to your request pursuant to § 4943(c)(7) of the Internal Revenue Code for an
additional five years to dispose of certain excess business holdings.

FACTS

You are recognized as a § 501(c)(3) tax-exempt trust classified as a private foundation.

Decedent A’s will established a qualified terminable interest property (QTIP) trust. Substantial
amounts of real and personal property passed to the QTIP trust for the benefit of Decedent B
during Decedent B’s lifetime. Upon Decedent B’s death, the remaining assets in the QTIP trust
passed to you. Upon your termination, your assets will be distributed 10% to School and 90%
to Foundation.

Decedent B died on Date 1. You represent that the executors of Decedent B’s estate
immediately commenced the administration of Decedent B’s estate. Decedent B’s timely filed
Federal estate tax return was accepted by the Internal Revenue Service (the “Service”)
pursuant to an Estate Tax Closing Letter. The executors of Decedent B’s estate filed the First
and Final Account of the Trustees of the QTIP trust with the Court. Pursuant to an order of the
Court, approving the First and Final Account, the assets of the QTIP trust were distributed to
you on Date 2.

The QTIP trust held numerous valuable assets, including 100% of the stock of a holding
company that owned groups of companies, with each group consisting of multiple wholly-owned
subsidiaries. You represent that the stock of the holding company, which included Company,
constituted excess business holdings as defined in § 4943(c)(1). Company is a real estate
developer that owns a large parcel of land.

On Date 3, you sold all of the shares of various companies, representing over 95% of the value
of your excess business holdings, to an unrelated third party. You represent that the stock of
Company also was offered to prospective purchasers; however, no prospective purchasers
expressed interest in Company.

As of Date 4, you continued to own Company, cash, and fixed income investments. You
represent that the stock of Company is your only remaining excess business holding, and it is
worth less than 5% of the total value of the excess business holdings originally received by you.

You represent that Company has made diligent and continuing efforts to dispose of its assets
and that you have made diligent and continuing efforts to dispose of Company’s stock. You
believe that neither you nor Company have been able to dispose of the land owned by, or stock
of, Company because of various “no growth” policies where the land is located, the current
market for real property where the property is located, and the significant size of the real estate
holdings of Company.

You represent that since Date 5, as an alternative to selling the land held by Company, you
have engaged in extensive discussions with School to contribute the remaining assets of
Company to School. School is a § 501(c)(3) tax-exempt educational institution. You state that
as of the date of this request, School indicated that it wants to receive the assets of Company.
You represent, however, that School requires additional time to perform its due diligence review.
School did not complete its due diligence efforts in time for you to transfer the remaining assets
of Company to School within the initial 5-year period provided in § 4943(c)(6) (§ 4943(c)(6)
period).

Your plan to dispose of your remaining excess business holdings (Company) within the next five
years is: (1) contribute Company to School, (2) if School does not accept the contribution, sell
the assets or stock of Company, or (3) dispose of Company’s assets through an auction
concluded before the expiration of the 5-year extension requested herein. This plan was filed
with the Attorney General of State, who responded with a no objection letter.

In your request for rulings, you stated that you did not believe that you would be able to dispose
of your excess business holding (Company) within the § 4943(c)(6) period. You stated that if
you were not to be granted an extension, you would be forced to sell your excess business
holding through an immediate auction, realizing a value significantly below fair market, which
would have been to the detriment of you and your beneficiaries - Foundation and School.

RULINGS REQUESTED

1. You requested a ruling that the § 4943(c)(6) period to dispose of the excess business
   holdings received by you from the QTIP trust commenced on Date 2.

2. You requested a ruling extending the § 4943(c)(6) period for disposing of excess
   business holdings pursuant to § 4943 for an additional five years pursuant to
   § 4943(c)(7) (§ 4943(c)(7) extension).

LAW

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

Section 4943(c)(1) 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)(6) provides, in pertinent part, that, if there is a change in the holdings in a
business enterprise which causes a private foundation to have—

(A) 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) provides that the Service may extend the § 4943(c)(6) period to dispose of
excess business holdings for an additional five years where there is a large gift or bequest of
diverse business holdings or holdings with complex corporate structures if:

(A) the foundation establishes that (i) diligent efforts to dispose of such holdings have been
made within the § 4943(c)(6) period, and (ii) disposition within the § 4943(c)(6) period has
not been possible (except at a price substantially below fair market value) by reason of
such size and complexity or diversity of such holdings;

(B) before the close of the § 4943(c)(6) period (i) the private foundation submits to the
Secretary a plan for disposing of all of the excess business holdings involved in the
extension, and (ii) the private foundation submits the plan described in clause (i) to the
Attorney General (or appropriate State official) and submits to the Secretary any response
received by the private foundation from the Attorney General (or appropriate State official)
to such plan during the § 4943(c)(6) period; and

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

Section 53.4943-6(b)(1) of the Foundation and Similar Excise Tax Regulations provides that 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 § 4943(c)(6) period shall not commence until the date on which
the distribution of such holdings from the estate or trust to the foundation occurs. Section
53.4943-6(b)(1) refers to rules relating to the determination of the date of distribution pursuant to
the terms of a will or trust.

Section 53.4943-5(b)(1) provides that the date of distribution shall be deemed to occur no later
than the date on which the trust or estate is considered to be terminated pursuant to § 1.641(b)-
(3) of the Income Tax Regulations.

Section 1.641(b)-(3)(b) provides that the determination of whether a trust has terminated
depends upon whether the property held in trust has been distributed to the persons entitled to
succeed to the property upon termination of the trust rather than upon the technicality of
whether or not the trustee has rendered its final accounting. A reasonable time is permitted
after such event for the trustee to perform the duties necessary to complete the administration
of the trust. Thus, if pursuant to the terms of the governing instrument, the trust is to terminate
upon the death of the life beneficiary and the corpus is to be distributed to the remainderman,
the trust continues after the death of the life beneficiary for a period reasonably necessary to a
proper winding up of the affairs of the trust.

ANALYSIS

Ruling 1: Whether the § 4943(c)(6) period to dispose of excess business holdings received by
you from the QTIP trust commenced on Date 2.

Pursuant to § 53.4943-6(b)(1), the § 4943(c)(6) period does not commence until the date of the
distribution of holdings in a business enterprise, pursuant to the terms of a trust, from the trust to
a foundation. Section 53.4943-5(b)(1) provides that the date of distribution is deemed to occur
no later than the date on which the trust is considered to be “terminated” pursuant to § 1.641(b)-
(3). Section 1.641(b)-(3)(b) provides that a trust terminates when the property held in trust is
distributed to the persons entitled to the property.

The assets of the QTIP trust, including the excess business holdings, were distributed to you on
Date 2.

Based on the information submitted and your representations, we have determined that the
§ 4943(c)(6) period to dispose of the excess business holdings received by you from the QTIP
trust commenced on Date 2.

Ruling 2: Whether to grant you a § 4943(c)(7) extension to dispose of your excess business
holdings (Company).

You stipulated that you are subject to § 4943, which imposes a tax on the excess business
holdings of private foundations. Pursuant to § 4943(c)(6)(A), if a private foundation acquires
holdings in a business enterprise by bequest and this acquisition causes the foundation to have
excess business holdings, the interest of the foundation in the business enterprise is treated as
held by a disqualified person (rather than by the foundation) for the § 4943(c)(6) period
beginning on the date the foundation acquired the holdings.

The Service may grant you a § 4943(c)(7) extension if: (1) you made diligent efforts to dispose
of the holdings during the § 4943(c)(6) period; (2) disposition within the § 4943(c)(6) period was
not possible (except at a price substantially below fair market value) because of the size and
complexity or diversity of the holdings; (3) you submitted to the Service and the appropriate
state official a plan for disposing of the excess business holdings before the

§ 4943(c)(7) extension ends; and (4) the plan reasonably can be completed before the close of
the § 4943(c)(7) extension.

During the § 4943(c)(6) period, you made diligent efforts to dispose of Company's holdings, as
required by § 4943(c)(7)(A)(i). You sold the vast majority of your excess business holdings.
You undertook sustained efforts to sell the assets or stock of Company, your sole remaining
excess business holding. You have been in lengthy discussions with School about contributing
Company to School. You represent that School likely will accept the contribution, however,
School has not completed its due diligence efforts. Other than by contributing Company to
School, disposition of Company is not possible now except at a price substantially below fair
market value because of the size, complexity, and diversity of Company’s holdings.

Before the end of the § 4943(c)(6) period you submitted a request to the Service pursuant to

§ 4943(c)(7) for a § 4943(c)(7) extension to dispose of Company or Company's assets.
Additionally, you described your plan for disposing of Company or Company’s assets. You also
submitted your plan to the Attorney General of State, who sent you a no objection letter to your
plan.

Based on the information submitted and your representations, we have determined that your
plan to dispose of your excess business holdings within the § 4943(c)(7) extension period is
reasonable. Accordingly, we conclude that you meet the requirements of § 4943(c)(7) for an
extension of five years to dispose of your Company holdings.

RULINGS

Based on the information submitted, we rule as follows:

1. The § 4943(c)(6) period to dispose of your excess business holdings began on Date 2.

2. The period during which you must dispose of your excess business holdings in Company is
   extended an additional five years to Date 6.

Because you stipulated that you are subject to § 4943, we are not ruling on whether your
interest in Company constitutes “excess business holdings” under § 4943(c)(1).

This ruling will be made available for public inspection pursuant to § 6110 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) 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.

Sincerely,

Andrew F. Megosh, Jr.
Manager, Exempt Organizations
Guidance Group 2

Enclosure: Notice 437