Foundation received five more years to sell inherited business holdings

Plain-English summary

A private foundation inherited minority interests in a corporation and an LLC, creating excess business holdings under section 4943. Transfer restrictions, regulatory approval requirements, adversarial management, pandemic-related economic harm, and one entity's inability to obtain operating approval prevented a timely sale at fair market value. During the initial five-year disposal period, the foundation pursued a third-party sale and a recapitalization, obtained an appraisal, and developed plans to sell enough interests to reach the permitted ownership threshold or receive liquidation proceeds. It submitted its disposal plan to the IRS and the state attorney general before the applicable deadlines. The IRS concluded that the unusually large and complex holdings, diligent disposal efforts, and reasonable plan satisfied section 4943(c)(7), so it granted an additional five years to dispose of both interests without the section 4943 excise tax.

Ruling snapshot

• Question: Did the foundation qualify for an additional five years to dispose of inherited excess business holdings?
• Outcome: approved (additional five-year disposal period)
• Key authorities: IRC §§ 4943(a)(1), 4943(c)(1), 4943(c)(2), 4943(c)(6), 4943(c)(7), and 4946(a)(1)

Full text (IRS public release)

 Internal Revenue Service                                    Department of the Treasury
                                                             Washington, DC 20224

 Number: 202251003                                           Third Party Communication: None
 Release Date: 12/23/2022                                    Date of Communication: Not Applicable
 Index Number: 4943.00-00
                                                             Person To Contact:
 -------------------------------------                       --------------------, ID No. -----------------
 ---------------------------------------------               Telephone Number:
 ----------------------------------------------              --------------------
                                                             Refer Reply To:
                                                             CC:EEE:EOET:EO2
                                                             PLR-106447-22
                                                             Date:
                                                             September 23, 2022




LEGEND:

Taxpayer = -------------------------------------
State = -------------
Individuals = -------------------------------------------------------------------
Community = -----------------------------
Granddaughter = --------------------
Trust = ----------------------------------
Entity 1 = ------------------------------------------
Entity 2 = ------------------------------------
Industry = ------------------------
Date 1 = ----------------
Date 2 = -------------------
Date 3 = ----------------------
Date 4 = ----------------
Date 5 = ----------------------
A = -----
B = ---
C = ----
Z = ---




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

This letter ruling is in response to a request from your authorized representative dated
March 11, 2022, and subsequent documentation requesting an extension of an
additional five years under Internal Revenue Code (“IRC”) section 4943(c)(7) for
disposing of certain excess business holdings. Taxpayer represents the facts as
PLR-106447-22                                 2

follows.

FACTS

Taxpayer was incorporated as a State nonprofit corporation. Taxpayer is
exempt from federal income tax under IRC section 501(a) as an organization described
in IRC section 501(c)(3) and is classified as a private foundation under IRC section
509(a). Taxpayer was created by Individuals to support the domestic and international
Community and various charitable organizations. Individuals were substantial
contributors to Taxpayer within the meaning of IRC section 507(d)(2), and therefore
disqualified persons with respect to Taxpayer under IRC section 4946(a)(1)(A).

As a result of Individuals’ death, Taxpayer received A shares of Entity 1 common voting
stock from Trust, a disqualified person, on Date 1, which Taxpayer represents is an
unusually large testamentary gift or bequest. Additionally, on Date 2, Granddaughter,
who is the granddaughter of one of the Individuals, and who serves as a co-trustee of
Taxpayer, received a testamentary disposition from Trust of B shares of Entity 1
common voting stock. Granddaughter is also a disqualified person under IRC section
4946. The combined shares of Taxpayer and Granddaughter represent approximately
C percent of Entity 1’s outstanding capital stock and are a minority interest in Entity 1.
As a result of the testamentary gift or bequest of the A shares, Taxpayer has excess
business holdings of Entity 1 under IRC section 4943(c)(1).

On Date 3, also as a result of Individuals’ death, Taxpayer received from Trust an
approximate Z percent membership interest in Entity 2, an LLC, which taxpayer
represents is an unusually large testamentary gift or bequest. As a result of the
testamentary gift or bequest of the LLC membership interest, which is a minority
interest, Taxpayer has excess business holdings of Entity 2 under IRC section
4943(c)(1).

Taxpayer has encountered several obstacles in its effort to dispose of its excess
business holdings. Both the shareholder’s agreement of Entity 1 and operating
agreement of Entity 2 contain significant restrictions on transfer of the Taxpayer’s
interest in these entities, including the requirement that any buyer be approved by State
regulatory authorities, making a sale of Taxpayer’s minority interest in these entities
difficult. In addition, both Entity 1 and Entity 2 are in the Industry, which is complex and
highly regulated and therefore complicated the sale of Taxpayer’s interests. Further,
Taxpayer states that management of the two entities was adversarial to Taxpayer for
several years, and therefore depressed the value of Taxpayer’s interests in them and
complicated their potential sale. Also, the COVID-19 pandemic and related
governmental restrictions have had a significant negative economic impact on the two
entities and have hindered the ability of the Taxpayer to obtain fair market value for its
interest in the entities. Finally, Entity 2 has been unable to operate for some time due to
its inability to obtain required governmental approvals and, despite Entity 2’s efforts, it
appears unlikely that it will be able to obtain these approvals.
PLR-106447-22                                  3


Despite the obstacles noted above, Taxpayer represents that it has made diligent efforts
during the initial five-year period to dispose of its interests in Entity 1 and Entity 2.
Taxpayer states that it pursued a potential sale of its shares in Entity 1 to a third party,
but the transaction was not completed, primarily due to the significant transfer
restrictions mentioned above. In addition, Taxpayer proposed a plan of recapitalization
to convert sufficient Entity 1 stock from voting to nonvoting shares to reduce its and
Granddaughter’s aggregate percentage ownership of shares of voting stock to the
permitted 20 percent or less threshold. However, despite showing early promise, these
efforts failed due to Taxpayer’s adversarial relationship with Entity 1 management.

Taxpayer continues to be diligent in its efforts to dispose of its excess business holdings
and has a plan of disposition for both Entity 1 and Entity 2. With respect to Entity 1,
after its recapitalization plan recently failed, Taxpayer states that it will pursue a sale of
a sufficient number of Entity 1 shares to reduce its and Granddaughter’s aggregate
percentage ownership of shares of voting stock to the permitted 20 percent or less
threshold. Taxpayer indicates that it has a plan in place to identify prospective buyers.
First, it will engage in private discussions with several other interested Entity 1
shareholders to obtain an offer for the sale of its shares. Second, it will solicit offers
from other Entity 1 shareholders. Finally, it will solicit offers from outside third parties.
Taxpayer states that it is currently engaged in ongoing discussions with multiple Entity 1
shareholders regarding the potential sale of some its shares and is also aware of other
potential outside third-party purchasers. Additionally, Taxpayer has obtained an
appraisal of its interest in Entity 1, which it will update once a purchaser has been
identified and the parties are further along in negotiations.

Taxpayer states that as Entity 2’s ongoing efforts to obtain regulatory approval to
resume operations have not been successful and Taxpayer anticipates that Entity 2’s
management will liquidate. Taxpayer would receive a share of the net proceeds in
liquidation and no longer have excess business holdings. However, if Entity 2 is able to
obtain the necessary approval to operate, Taxpayer plans to sell a sufficient amount of
its membership interest in Entity 2 so that it will not hold more than 20 percent of the
total membership interest in Entity 2.

Taxpayer’s initial five-year period for disposing of excess business holdings under IRC
section 4943(c)(6) ended on Date 4 for Entity 1 and will end on Date 5 for Entity 2. Prior
to the end of these initial five-year periods under IRC section 4943(c)(6), Taxpayer
submitted a plan to the Internal Revenue Service for disposing of the excess business
holdings in these two entities. Taxpayer has also submitted this plan to the State
attorney general and provided the State attorney general’s response to the plan to the
Internal Revenue Service.

Based on the documentation submitted and the facts and representations described
above, Taxpayer requested the following ruling.
PLR-106447-22                                 4

RULING REQUEST

    1. Extend for an additional five years the period of time for disposing of Taxpayer’s
      excess business holdings under IRC section 4943(c)(7).

LAW

IRC section 4943(a)(1) imposes a tax on the value of excess business holdings of any
private foundation in a business enterprise.

IRC 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 that 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.

IRC section 4943(c)(2) provides 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.

IRC section 4943(c)(6) generally provides that if there is a change in a private
foundation’s holdings in a business enterprise (other than by purchase by the private
foundation or by a disqualified person) that 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 five-
year period beginning on the date of such change.

IRC section 4943(c)(7) provides that the Secretary may extend the IRC section
4943(c)(6) period to dispose of excess business holdings for an additional five years 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 have been made within 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 the size and complexity or
       diversity of such holdings;

       (B) before the close of the initial five-year 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 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
PLR-106447-22                                 5

       the Secretary any response received by the private foundation during the five-
       year period; and

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

ANALYSIS

Taxpayer received a gift or bequest of Entity 1 stock and Entity 2 membership interest
from Individuals through Trust, both disqualified persons with respect to Taxpayer under
IRC section 4946(a)(1). Taxpayer’s ownership of the Entity 1 stock and Entity 2
membership interest constitutes excess business holdings under IRC section
4943(c)(1), and Taxpayer received the stock and membership interest other than by
purchase by Taxpayer or by disqualified persons with respect to Taxpayer. As a result,
IRC section 4943(c)(6) provides Taxpayer with an initial five-year period to dispose of its
excess business holdings, which ended on Date 4 for Entity 1 and will end on Date 5 for
Entity 2.

The shares of stock in Entity 1 and membership interest in Entity 2 received by
Taxpayer represent a significant portion of Entity 1’s outstanding capital stock and Entity
2’s total membership interest. Both entities are in Industry, which is complex and highly
regulated. Accordingly, Individuals’ gift of Entity 1 stock and Entity 2 membership
interest to Taxpayer represents an unusually large gift of diverse business holdings with
a complex corporate structure within the meaning of IRC section 4943(c)(7).

During the initial five-year period, Taxpayer has made diligent efforts to dispose of its
excess business holdings. However, it has been unable to do so for a variety of
reasons, including significant transfer restrictions on its interests in the entities, the
complex and highly regulated nature of Industry, an adversarial relationship with
management of the two entities, economic issues relating to the COVID-19 pandemic,
and the inability of one of the entities to operate because it lacked governmental
approvals.

Before the end of the initial five-year period for both entities, Taxpayer submitted a
request seeking an additional five-year period within which to dispose of its excess
business holdings in Entity 1 and Entity 2 along with a plan for disposing all of the
excess business holding during the extension period. Taxpayer’s plan with respect to
Entity 1 is to pursue a sale of a sufficient number of Entity 1 shares to reduce its and
Granddaughter’s voting stock shares to or below the permitted 20 percent threshold.
With respect to Entity 2, Taxpayer’s plan is to either receive the liquidation proceeds
from Entity 2 if it is unable to obtain regulatory approval to resume operations, in which
case Taxpayer will no longer have excess business holdings, or, if Entity 2 receives
approval to resume operations, sell a sufficient amount of its membership interest so
that it will hold no more than the permitted 20 percent of the total membership interest in
Entity 2.
PLR-106447-22                                  6


Taxpayer has also submitted its plan to the State attorney general and provided the
State attorney general’s response to the plan to the Internal Revenue Service.

RULING

Based on the facts and representations submitted by Taxpayer, we have determined
that Taxpayer’s plan to dispose of its excess business holdings in Entity 1 and Entity 2
can reasonably be expected to be carried out before the close of the extension period.

Therefore, we conclude that Taxpayer meets the requirements under IRC section
4943(c)(7) for an extension of an additional five years to dispose of these excess
business holdings. Consequently, Taxpayer’s excess business holdings in Entity 1 and
Entity 2 will not be subject to tax under IRC section 4943(a)(1) if Taxpayer disposes of
them before the close of the extension period.

The rulings contained in this letter are based upon information and representations
submitted by or on behalf of Taxpayer and accompanied by penalty of perjury
statements executed by an individual with authority to bind 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 these rulings, it is
subject to verification on examination. The Associate Chief Counsel (Employee
Benefits, Exempt Organizations, and Employment Taxes) will revoke or modify a letter
ruling and apply the revocation retroactively if there has been a misstatement or
omission of controlling facts; the facts at the time of the transaction are materially
different from the controlling facts on which the ruling was based; or, in the case of a
transaction involving a continuing action or series of actions, the controlling facts
change during the course of the transaction. See Rev. Proc. 2022-1, 2022-1 I.R.B. 1,
section 11.05.

This letter does not address the applicability of any section of the Code or Regulations
to the facts submitted, other than those sections specifically described. Except as
expressly provided herein, no opinion is expressed or implied concerning the tax
consequences of any aspect of any transaction or item discussed or referenced in this
letter. Specifically, no opinion is expressed as to the existence or acts of disqualified
persons with respect to Taxpayer, nor is any opinion expressed regarding Taxpayer’s
plan of disposition beyond the rulings provided herein.

This ruling is directed only to the taxpayer requesting it. IRC section 6110(k)(3)
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 Taxpayer’s authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
PLR-106447-22                                            7

Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

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.
                                            Senior Tax Law Specialist
                                            Exempt Organizations Branch 2
                                            Employee Benefits, Exempt Organizations, and
                                            Employment Taxes

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