PLR 1303021: Private foundation's nonvoting stock and trust holdings approved

Plain-English summary

A private foundation asked whether it could hold nonvoting stock in a corporation without incurring the excise tax on excess business holdings. It also asked whether four family and charitable trusts would be disqualified persons for purposes of the excess-business-holdings rules. The IRS concluded that the foundation's direct nonvoting shares would be permitted holdings because disqualified persons would not own more than 20 percent of the corporation's voting stock. It also concluded that the trusts were not disqualified persons because family members who were disqualified persons would hold less than 35 percent of each trust's beneficial interest.

Ruling snapshot

• Question: Would the foundation's nonvoting stock be permitted holdings, and would the family and charitable trusts be disqualified persons?
• Outcome: Approved.
• Key authorities: IRC §§ 4943, 4946, 501, 507, 509, and 6110; Treas. Reg. §§ 53.4943-1, 53.4943-2, 53.4943-3, 53.4943-8, and 53.4946-1.

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201303021 Contact Person:
Release Date: 1/18/2013
Date: October 22, 2012 Identification Number:

Uniform Issue List: Telephone Number:

4943.00-00
4946.00-00 Employer Identification Number:

Legend:

Corporation
Founder

Wife

Children

Grandchildren

Trust 1

Xt

Trust 2

Trust 3

Trust 4

Family and Charitable Trusts

[illegible]

Dear

This is in response to your ruling request dated September 21, 2011, requesting a ruling that
your ownership of Corporation non-voting stock will not give rise to excise tax on excess
business holdings under § 4943 of the Internal Revenue Code (“Code”).

FACTS

You have been recognized as an organization exempt under § 501(a) of the Code because you
are described in § 501(c)(3) and are classified as a private foundation within the meaning of §
509(a). Founder, his spouse (“ Wife”), and business entities they own have donated a
substantial amount of money to you. You state that as a result, Founder, Wife, and Corporation
are substantial contributors with respect to you.

You represent that Founder, family members, and various trusts for family members currently

own all of the voting shares and most of the non-voting shares of Corporation.

You state that under Trust 1 and Trust 4, of which Founder and Wife are the settlors, you will
receive X1 non-voting shares of Corporation stock. You will not hold any direct or indirect
interest in the voting shares of Corporation.

You state that under the proposed transaction, Founder and Wife have created revocable trusts
and that they will transfer their Corporation voting shares to the trustee under Trust 2 and Trust
3 upon receipt of a favorable ruling. Thereafter, the voting shares so transferred will be divided
into four separate irrevocable trusts (“collectively referred to as the Family and Charitable
Trusts”). Each of the Family and Charitable Trusts will have both charitable and non-charitable
beneficiaries. Each of the Family and Charitable Trusts will not own more than 20 percent of
the Corporation voting shares. After the transfers of the Corporation voting shares to the Family
and Charitable Trusts, Founder's children (“Children”) will each own directly less than 20
percent of Corporation voting shares.

The non-charitable beneficiaries of the Family and Charitable Trusts will be Children and
grandchildren of Founder and Wife (“Grandchildren”). Children and_Grandchildren will have
less than a 35-percent beneficial interest in each of the trusts, which will consist solely of an
income interest.

The charitable beneficiaries of the Family and Charitable Trusts will have more than a 65-
percent beneficial interest in each. Upon termination of each of the Family and Charitable
Trusts, each of the trusts’ charitable beneficiaries will receive 100 percent of the trust assets as
the only remainder beneficiaries of each trust.

RULINGS REQUESTED
You requested the following rulings:

1. That Corporation non-voting shares to be held directly by you will be permitted holdings and
   will not be excess business holdings within the meaning of § 4943 of the Code.

2. That for purposes of § 4943 of the Code, the Family and Charitable Trusts described above
   are not disqualified persons with respect to you within the meaning of § 4946.

LAW

Section 4943(a)(1) of the Code imposes a tax on the excess business holdings of any private
foundation in a business enterprise during any taxable year which ends during the taxable
period. The tax is equal to 10 percent of the value of such holdings.

Section 4943(c)(1) of the Code defines the term "excess business holdings" as the amount of
stock in a corporation that a foundation would have to dispose of to a person other than a
disqualified person in order for the remaining holdings of the foundation in the corporation to be
permitted holdings.

Section 4943(c)(2) of the Code limits the holdings of a private foundation in a corporation to 20
percent of the voting stock of the business enterprise, reduced by the percentage of the voting
stock owned by all disqualified persons.

Section 4943(c)(2)(A) of the Code provides that the permitted holdings of any private foundation
in an incorporated business enterprise are:

(i) 20 percent of the voting stock, reduced by
(ii) The percentage of the voting stock owned by all disqualified persons.

In addition, in any case in which all disqualified persons together do not own more that 20
percent of the voting stock of an incorporated business enterprise, nonvoting stock held by the
private foundation shall also be treated as permitted holdings.

Section 4943(d)(1) provides that in computing the “business holdings’ of a private foundation, or
a disqualified person with respect thereto, in any business enterprise, any stock or other interest
owned, directly or indirectly, by or for a trust shall be considered as being owned proportionately
by or for its beneficiaries.

Section 4946(a)(1) of the Code provides, in part, that for purposes of this subchapter, the term
"disqualified person" means, with respect to a private foundation, a person who is--
(A) a substantial contributor to the foundation,
(B) a foundation manager (within the meaning of subsection (b)(1)),
(C) an owner of more than 20 percent of--
(i) the total combined voting power of a corporation,
(ii) the profits interest of a partnership, or
(iii) the beneficial interest of a trust or unincorporated enterprise,
which is a substantial contributor to the foundation,
(D) a member of the family (as defined in subsection (d)) of any individual described in
subparagraph (A), (B), or (C),
(E) a corporation of which persons described in subparagraph (A), (B), (C), or (D) own more
than 35 percent of the total combined voting power,
(F) a partnership in which persons described in subparagraph (A), (B), (C), or (D) own more
than 35 percent of the profits interest,
(G) a trust or estate in which persons described in subparagraph (A), (B), (C), or (D) hold
more than 35 percent of the beneficial interest, and
(H) only for purposes of § 4943, a private foundation--
(i) which is effectively controlled (directly or indirectly) by the same person or persons who
control the private foundation in question, or
(ii) substantially all of the contributions to which were made (directly or indirectly) by the
same person or persons described in subparagraph (A), (B), or (C), or members of their families
(within the meaning of subsection (d)), who made (directly or indirectly) substantially all of the
contributions to the private foundation in question.

Section 4946(a)(2) of the Code provides that for purposes of paragraph (1), the term
“substantial contributor” means a person who is described in § 507(d)(2).

Section 4946(d) of the Code provides that for purposes of subsection (a)(1), the family of any
individual shall include only his spouse, ancestors, children, grandchildren, great grandchildren,
and the spouses of children, grandchildren, and great grandchildren.

Section 53.4943-1 of the Foundation and Similar Excise Taxes Regulations ("foundation
regulations") provides that generally, under § 4943 of the Code, the combined holdings of a
private foundation and all disqualified persons (as defined in § 4946(a)) in any corporation
conducting a business which is not substantially related to the exempt purpose of the foundation
are limited to 20 percent of the voting stock in such corporation.

Section 53.4943-2(a) of the foundation regulations imposes an initial excise tax on the excess
business holdings of a private foundation.

Section 53.4943-3(a) of the foundation regulations 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 in the enterprise the foundation or disqualified person would
have to dispose of to a person other than a disqualified person in order for the remaining
holdings of the foundation in the enterprise to be permitted holdings.

Section 53.4943-3(b)(1)(i) of the foundation regulations provides that except as otherwise
provided in § 4943(c)(2) and (4), the permitted holdings of any private foundation in an
incorporated business enterprise are 20 percent of the voting stock in such enterprise reduced
(but not below zero) by the percent of voting stock in such enterprise actually or constructively
owned by all disqualified persons.

Section 53.4943-3(b)(2)(i) of the foundation regulations provides that, in general, in addition to
those holdings permitted by paragraph (b)(1) of that section, the permitted holdings of a private
foundation in an incorporated business enterprise shall include any share of nonvoting stock in
such enterprise held by the foundation in any case in which all disqualified persons hold no
more than 20 percent of the voting stock in such enterprise. All equity interests which do not
have voting power attributable to them shall, for purposes of § 4943, be classified as nonvoting
stock.

Reg. §53.4943-3(c)(4)(ii) of the foundation regulations provides, in part, that for purposes of
section 4943, the beneficial interest of a private foundation or any disqualified person in a trust
shall be the beneficial remainder interest of such foundation or person determined as provided
in paragraph (b) of § 53.4943-8.

Reg. §53.4943-8(b) of the foundation regulations provides, in part, that any interest actually or
constructively owned by an estate or trust is deemed constructively owned, in the case of an
estate, by its beneficiaries or, in the case of a trust, by its remainder beneficiaries. Thus, if a
trust owns 100 percent of the stock of a corporation A, and if, on an actuarial basis, W's life

interest in the trust is 15 percent, Y's life interest is 25 percent, and Z's remainder interest is 60
percent, under this paragraph (b), Z will be considered to be the owner of 100 percent of the
stock of corporation A.

Section 53.4946-1 of the foundation regulations provides that for purposes of Chapter 42 and
the regulations thereunder, the following are disqualified persons with respect to a private
foundation:

(i) All substantial contributors to the foundation, as defined in § 507 (d)(2) and the regulations
thereunder.

(ii) All foundation managers of the foundation as defined in § 4946 (b)(1) and paragraph (f)(1)(i)
of that section,

(iii) An owner of more than 20 percent of:

(a) The total combined voting power of a corporation,

(b) The profits interest of a partnership,

(c) The beneficial interest of a trust or unincorporated enterprise,

which is (during such ownership) a substantial contributor to the foundation, as defined in §
507(d)(2) and the regulations thereunder,

(iv) A member of the family, as defined in § 4946(d) and paragraph (h) of this section, of any of
the individuals described in subdivision (i), (ii), or (iii) of this subparagraph,

(v) A corporation of which more than 35 percent of the total combined voting power is owned by
persons described in subdivision (i), (ii), (iii), or (iv) of this subparagraph,

(vi) A partnership of which more than 35 percent of the profits interest is owned by persons
described in subdivision (i), (ii), (iii), or (iv) of this subparagraph, and

(vii) A trust, estate, or unincorporated enterprise of which more than 35 percent of the beneficial
interest is owned by persons described in subdivision (i), (ii), (iii), or (iv) of this subparagraph.

Section 53.4946-1(a)(5) of the foundation regulations provides that for purposes of
subparagraph (1) (iii) (a) and (v) of this paragraph, the term "combined voting power" includes
voting power represented by holdings of voting stock, actual or constructive (under §
4946(a)(3)), but does not include voting rights held only as a director or trustee.

Section 53.4946-1(h) of the foundation regulations provides that for the purposes of this section,
the members of the family of an individual include only:

(1) His spouse,

(2) His ancestors,
(3) His lineal descendants, and
(4) Spouses of his lineal descendants.

For example, a brother or sister of an individual is not a member of his family for purposes of
this section. However, for example, the wife of a grandchild of an individual is a member of his
family for such purposes. For purposes of this paragraph, a legally adopted child of an individual
shall be treated as a child of such individual by blood.

ANALYSIS

Section 4943 of the Code imposes an excise tax on the excess business holdings of private
foundations. Section 4943(c)(1) defines excess business holdings as the amount of stock in a
corporation that a foundation would have to dispose of to a person other than a disqualified
person in order for the remaining holdings of the foundation in the corporation to be permitted
holdings. Section 4943(c)(2) provides that the permitted holdings of a foundation in a
corporation are 20 percent of the voting stock, reduced by the percentage of the voting stock
owned by all disqualified persons. In any case in which all disqualified persons together do not
own more than 20 percent of the voting stock of a corporation, nonvoting stock held by a private
foundation is treated as permitted holdings. Section 4943(c)(2)(A) and § 53.4943-3(b)(2) of the
foundation regulations. In order to determine whether the Corporation non-voting shares to be
held by you are permitted holdings under § 4943(c)(2)(A), we must first determine whether there
are disqualified persons involved in the transaction.

In this case, Founder is a disqualified person with respect to you as described under §
4946(a)(1)(A) of the Code because he is a substantial contributor. Wife, Children, and
Grandchildren are also disqualified persons under § 4946(d) with respect to Founder because
they are family members of a substantial contributor within the meaning of § 4946(a)(1)(A) of
the Code.

Section 4943(c)(2) of the Code provides that, in any case in which all disqualified persons
together do not own more than 20 percent of the voting stock of a corporation, nonvoting stock
held by the private foundation shall be treated as permitted holdings. Section 53.4943-3(b)(2)(i)
of the foundation regulations provides that the permitted holdings of a private foundation include
any share of nonvoting stock in a corporation when all disqualified persons hold, actually or
constructively, no more than 20 percent of the voting stock in the corporation. In this case, after
the transfer of Corporation voting stock from Trust 2 and Trust 3 to the Family and Charitable
Trusts, disqualified persons as described above will not own more than 20 percent of the voting
stock of Corporation for the purposes of § 4943(c)(2)(A).

Further, § 4946(a)(1)(G) of the Code states that the term “disqualified person” includes a trust of
which more than 35 percent of the beneficial interest is owned by disqualified persons such as a

substantial contributor and family members of a substantial contributor. Under the Family and
Charitable Trusts, Children and Grandchildren, who are disqualified persons as described
above, will have less than a 35-percent beneficial interest in each of the Family and Charitable
Trusts.

Furthermore, the stock held by the Family and Charitable Trusts will not be treated as being
held by a disqualified person because § 4946(a)(1)(G) provides that a trust is not a disqualified
person if disqualified persons do not hold over 35 percent of the beneficial interest. The Family
and Charitable Trusts are not disqualified persons with respect to you because the Family and
Charitable Trusts are trusts described in § 4946(a)(1)(G) of the Code in which persons
described in § 4946(a)(1)(B) or 4946(d) do not hold more than a 35-percent beneficial interest.
The assets of these trusts are considered, for purposes of section 4943, as owned by the
charitable remaindermen—see Reg. §53.4943-8(b).

RULINGS
Based on your facts and representations, we rule as follows:

1. The Corporation non-voting shares to be held directly by you will be permitted holdings and
   will not be excess business holdings within the meaning of § 4943 of the Code.

2. The Family and Charitable Trusts as described above are not disqualified persons with
   respect to you within the meaning of § 4946 of the Code.

This ruling will be made available for public inspection under § 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 and, in particular, it does not address tax matters relating to grantor trusts, powers of
appointment, or gift and estate taxation. 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