A private foundation's assignment of its trust remainder interest to a public charity will not create excess business holdings under section 4943

Plain-English summary

A private foundation held a residuary (remainder) interest in a testamentary trust whose assets include a large stake in a holding company that owns an operating business. The foundation assigned most of that remainder interest to a related public charity, a medical research organization described in sections 509(a)(1) and 170(b)(1)(A)(iii), keeping only enough of the company stock to stay within the present-holdings limits of section 4943. It asked the IRS to confirm that the company stock passing to the public charity would not be treated, for section 4943 excess-business-holdings purposes, as held by the foundation or by a disqualified person. The IRS so ruled. The public charity has no shareholders or definite beneficiaries to trigger the constructive-ownership rules, the assignment imposes no material restriction on disposing of the stock (the settlor's wish not to sell is only precatory), and a section 509(a)(1) medical research organization is not a disqualified person. So the assigned stock stays outside the foundation's excess-business-holdings computation.

Ruling snapshot

• Question: After a private foundation assigns most of its trust remainder interest to a related public charity, will the underlying business stock be treated under section 4943 as held by the foundation or by a disqualified person?
• Outcome: Approved (both rulings favorable)
• Key authorities: IRC § 4943(c), (d); Treas. Reg. § 53.4943-2(a)(1)(iv); Treas. Reg. § 53.4943-8(b)(2)(ii); Treas. Reg. § 53.4946-1(a)(7); IRC § 4947(a)(2)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202143001 Third Party Communication: None
Release Date: 10/29/2021 Date of Communication: Not Applicable
Index Number: 4943.03-00
Person To Contact:
------------------------------- ----------------------, ID No. -----------------
-------------------------------------- Telephone Number:
-------------------------------- ---------------------
Refer Reply To:
CC:EEE:EOET:EO1
PLR-102933-21
Date:
July 29, 2021

Foundation = -------------------------------
Public Charity = ---------------------------------------------
State = --------
Trust = ------------------------------------
Decedent = ----------------------------
Company X = ----------------------------------------
Company Y = ----------------------------------------------------
Z = ----------------------
Year A = -------
Year B = -------
Year C = -------
D% = ------
Date 1 = ------------------
Date 2 = ----------------

Dear -------------:

This letter responds to a request for rulings from your authorized representatives dated
February 2, 2021. The request involves rulings under section 4943 of the Internal
Revenue Code.1

Facts

Foundation was established in Year A in State as a charitable trust. Public Charity was
established in Year B in State as a charitable corporation. Both are recognized as tax-
exempt organizations described in section 501(c)(3). Foundation is classified as a

1 The Internal Revenue Code of 1986, as amended, to which all subsequent section references are made

unless otherwise indicated.
PLR-102933-21 2

private foundation under section 509(a), and Public Charity as a medical research
organization under sections 509(a)(1) and 170(b)(1)(A)(iii).

Trust was established in Year C in State under the will of Decedent. When the last of
Trust’s income beneficiaries dies, Trust will terminate and distribute part of its remaining
assets to Foundation. All of Trust’s assets are derived from amounts transferred in trust
before May 27, 1969, as described in section 4947(a)(2)(C) and Treas. Reg. § 53.4947-
1(c)(5)(i). Taxpayer represents that Trust is not a disqualified person with respect to
Foundation (based upon Z).

For many years, Foundation’s trustees considered the possibility of selling or assigning
all or part of Foundation’s remainder interest in Trust. On Date 1, Foundation obtained a
declaratory judgment holding that, with the consent of Trust’s trustee, Foundation is
allowed to sell or assign all or a portion of its income or residuary interest in Trust.
Foundation has decided to assign most of its residuary interest in Trust to Public
Charity.

The rulings requested involve an assignment from Foundation to Public Charity of most
of Foundation’s residuary interest in Trust, which owns significant assets, including a
significant percentage of shares of stock of Company X, a holding company that owns
100% of Company Y, a business enterprise.

On Date 2, Foundation entered into an assignment agreement (Assignment), pursuant
to which Foundation assigned to Public Charity its entire residuary interest in Trust,
except for Foundation’s right to receive from Trust the following assets, if still owned by
Trust upon the death of the last income beneficiary: (a) a particular asset in which
Foundation currently owns an undivided interest, and which Foundation intends to
contribute to State; and (b) the number of shares of Company X stock that, when
combined with other shares of Company X stock owned by Foundation on such date,
would cause Foundation’s total interest in Company X stock to equal D%, a permissible
percentage under the present holdings rules of section 4943. Foundation retained the
right to rescind the Assignment if it fails to receive the requested rulings in this ruling
request. Although the Assignment authorizes Public Charity not to sell the Company X
stock received in the assignment (to respect the intent and wishes of Decedent under
the terms of the will), the Assignment does not restrict Public Charity from disposing of
the stock.

Taxpayer’s representative states that Foundation’s current holdings of Company X
stock do not constitute excess business holdings as a result of the present holdings
rules under section 4943(c).

Rulings Requested
Foundation requests the following rulings:
PLR-102933-21 3

   1. Any Company X stock that Public Charity receives from Trust pursuant to the
      Assignment and the terms of the will of Decedent will not be treated for
      purposes of section 4943 as being held by Foundation.

   2. While Public Charity qualifies as a medical research organization described in
      section 170(b)(1)(A)(iii), any Company stock that Public Charity receives from
      Trust pursuant to the Assignment and the terms of the will of Decedent will
      not be treated for purposes of section 4943 as being held by a disqualified
      person with respect to Foundation.

Law

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

Section 4943(c)(1) defines excess business holdings as, 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(d)(1) provides that in computing the holdings of a private foundation or a
disqualified person in a business enterprise, any stock or other interest owned, directly
or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as
being owned proportionately by or for its shareholders, partners, or beneficiaries. The
preceding sentence shall not apply with respect to an income or remainder interest of a
private foundation in a trust described in section 4947(a)(2), but only if, in the case of
property transferred in trust after May 26, 1969, such foundation holds only an income
interest or only a remainder interest in such trust.

Section 53.4943-2(a)(1)(ii) provides that excess business holdings acquired other than
by purchase will not be subject to section 4943 tax if the foundation disposes of the
excess within 90 days from the date the foundation knows or has reason to know of the
event that caused it to have excess holdings.

Section 53.4943-2(a)(1)(iv) provides that if a private foundation disposes of an interest
in a business enterprise but imposes any material restrictions or conditions that prevent
the transferee from freely and effectively using or disposing of the transferred interest,
then the transferor foundation will be treated as owning such interest until all such
restrictions or conditions are eliminated (regardless of whether the transferee is treated
for other purposes of the Code as owning such interest from the date of the transfer).
However, a restriction or condition imposed in compliance with federal or state
securities laws, or in accordance with the terms or conditions of the gift or bequest
through which such interest was acquired by the foundation, shall not be considered a
material restriction or condition imposed by a private foundation.
PLR-102933-21 4

Section 53.4943-8(b)(2)(ii) provides that in the case of an interest in a business
enterprise which was transferred to a trust described in section 4947(a)(2) (without
regard to section 4947(a)(2)(C)) on or before May 26, 1969, for the benefit of a private
foundation, no portion of such interest shall be considered as owned by the foundation
until it is actually distributed to the foundation or until the trust ceases to be so
described.

Section 53.4946-1(a)(7) provides that for purposes of Chapter 42 a disqualified person
shall not include an organization described in section 509(a)(1).

Analysis

Requested Ruling 1

The constructive ownership rules of section 4943(d)(1) and regulations thereunder
provide that a corporation, partnership, estate, or trust is generally considered as owned
proportionately by or for its shareholders, partners, or beneficiaries. In this case, Public
Charity, a charitable corporation, has no shareholders and no definite beneficiaries, and
thus Public Charity’s business holdings would not be considered as owned by
Foundation. We also note that Foundation is not considered to currently own a
proportionate share of the business holdings of Trust by reason of Foundation’s
residuary interest, per § 53.4943-8(b)(2)(ii).

Another situation in which an interest in a business enterprise held by a third party may
be treated as held by a private foundation is set forth in § 53.4943-2(a)(1)(iv). This
regulation treats a private foundation as retaining interests that are excess business
holdings if the foundation transfers such interests but imposes any material restrictions
or conditions that prevent the transferee from freely and effectively using or disposing of
the transferred interest until such restrictions or conditions are eliminated. We do not
consider the Assignment’s precatory referencing of Trust settlor’s desire not to sell the
stock as a material restriction or condition, and the Assignment imposes no other
material restrictions or conditions (other than Foundation’s right to rescind the
assignment if it does not receive the requested rulings).

Requested Ruling 2

Under § 53.4946-1(a)(7), a disqualified person for purposes of section 4943 does not
include a medical research organization under sections 509(a)(1) and 170(b)(1)(A)(iii).
And as discussed above, Public Charity has no shareholders or beneficiaries to
constructively own Public Charity’s business holdings. Thus, as long as Public Charity is
described in section 170(b)(1)(A)(iii), its holdings of Company X stock will not be treated
as held by a disqualified person with respect to Foundation.

Rulings
PLR-102933-21 5

Based solely on the facts and representations submitted by Foundation, we rule as
follows:

   1. Any Company X stock that Public Charity receives from Trust pursuant to the
      Assignment and the terms of the will of Decedent will not be treated for
      purposes of section 4943 as being held by Foundation.

   2. While Public Charity qualifies as a medical research organization described in
      section 170(b)(1)(A)(iii), any Company stock that Public Charity receives from
      Trust pursuant to the Assignment and the terms of the will of Decedent will
      not be treated for purposes of section 4943 as being held by a disqualified
      person with respect to Foundation.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by penalty of perjury statements executed
by an individual with authority to bind the taxpayer, and upon the understanding that
there will be no material changes in the facts. While this office has not verified any of
the material submitted in support of the request for rulings, such material is subject to
verification on examination.

The Associate Office will revoke or modify a letter ruling and apply the revocation
retroactively if: (1) there has been a misstatement or omission of controlling facts; (2)
the facts at the time of the transaction are materially different from the controlling facts
on which the ruling is based; or (3) the transaction involves a continuing action or series
of actions and the controlling facts change during the course of the transaction. See
Rev. Proc. 2021-1, 2021-1 IRB 1, § 11.05.

Except as specifically set forth above, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter, and no ruling is granted as to whether Public Charity qualifies as an
organization described in section 170(b)(1)(A)(iii) or otherwise in section 501(c) or
section 509(a).

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

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
PLR-102933-21 6

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,



                                Theodore R. Lieber
                                Senior Tax Law Specialist
                                Exempt Organizations Branch 1
                                (Employee Benefits, Exempt Organizations, and
                                Employment Taxes)

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