Five more years granted to a charitable trust to sell excess business holdings in a niche company

Plain-English summary

Private foundations (and trusts treated like them) generally cannot own more than
a small slice of a business, and if a large stake lands in their hands by gift or
inheritance they get five years to sell down to the permitted level or face an
excise tax. Here, a trust became a charitable trust treated as a private
foundation after the estate that created it was settled, leaving it holding a
majority-type interest in a closely held company in a highly specialized, heavily
regulated niche market. The trustees tried hard to sell within the five years, but
the company's unusual business, the need to stay near a regulator in one city, the
COVID-19 disruption, and buyers' reluctance to take less than a controlling stake
all blocked a sale at fair value. Before the deadline, the trust filed a
disposition plan with the IRS and the state Attorney General and asked for the
extra five years the law allows for unusually large or complex holdings. The IRS
granted the extension: the trust made diligent efforts, a sale was not possible
except at a price well below fair value, and its plan can reasonably be expected to
work within the extension. As a result, no excess-business-holdings tax applies if
the trust sells before the new deadline.

Ruling snapshot

• Question: Should the trust get an additional five years to dispose of its excess business holdings without incurring the excise tax?
• Outcome: Approved (five-year extension granted under IRC § 4943(c)(7))
• Key authorities: IRC § 4943(a), (c)(6), (c)(7); § 4947(a)(1); § 4946; Treas. Reg. §§ 53.4943-6, 53.4947-1

Full text (IRS public release)

Internal Revenue Service                          Department of the Treasury
                                                  Washington, DC 20224

Number: 202426013                                 Third Party Communication: None
Release Date: 6/28/2024                           Date of Communication: Not Applicable
Index Number: 4943.00-00, 4947.00-00
                                                  Person To Contact:
                                                    --------------, ID No.
                                                  Telephone Number:
                                                    --------------
                                                  Refer Reply To:
                                                    CC:EEE:EOET:EO1
                                                  PLR-120549-23
                                                  Date:
                                                  March 25, 2024

Legend

Trust             = --------------
Trustor           = --------------
Company           = --------------
X                 = --------------
Y                 = --------------
Z                 = --------------
Foundation        = --------------
Date 1            = --------------
Date 2            = --------------
Date 3            = --------------
City              = --------------
Regulatory Agency = --------------
State             = --------------

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

This letter ruling responds to a request dated October 4, 2023, and subsequent
correspondence submitted on behalf of Trust, requesting an extension of an additional
five years under section 4943(c)(7) of the Internal Revenue Code (Code) 1 for disposing
of certain excess business holdings.

FACTS

Trust was established by Trustor and became irrevocable on his death. Company was a
closely held corporation acquired by Trustor. Until Trustor's death, Trustor was the sole
director and owner of all of the issued and outstanding shares of Company, which was

1
    All references in this letter ruling to "section" refer to the Internal Revenue Code of 1986, as amended.

taxed as an S corporation. After Trustor's death, 100 percent of Company was held by
Trust and the trustees converted Company to a limited liability company. The trustees
sold a combined X% interest in Company to two key employees of Company. Y% of
Company was distributed to a trustee of Trust pursuant to the terms of the trust
instrument, leaving Trust with a Z% interest in Company which is treated as a
partnership for federal income tax purposes. The trustee who received a Y% interest in
Company is a disqualified person with respect to Trust as a foundation manager under
section 4946(a)(1)(B).

Trust represents that following the distribution of certain assets in accordance with the
terms of the trust instrument, the remaining assets held by Trust include a Z% interest in
Company and a 100% ownership interest in two other companies that are excepted
from the definition of a "business enterprise" under section 4943(d)(3) because 100
percent of the gross income they derive is from passive sources. Trust's sole remaining
beneficiary is Foundation, which is an organization that is exempt from income tax
under section 501(c)(3) and classified as a private foundation under section 509(a).

Trust represents that Trustor's estate claimed and was allowed a charitable deduction
under section 2055 on its Form 706, United States Estate (and Generation-Skipping
Transfer) Tax Return, and that Trust has claimed and been allowed deductions under
section 642(c) on its Forms 1041, U.S. Income Tax Return for Estates and Trusts.

Prior to Date 1, which Trust represents is the "applicable date" under section 645(b)(2)
and regulations thereunder, Trust was treated as part of Trustor's estate per an election
made under section 645. This election terminated one day before Date 1, at which time
Trust represents that because there were no noncharitable interests remaining, Trust
became a nonexempt charitable trust described in section 4947(a)(1) and treated as an
organization described in section 501(c)(3) which is classified as a private foundation
under section 509. Trust further represents that due to its Z% interest in Company,
Trust owned excess business holdings that required disposition.

Beginning around Date 1, the trustees of Trust began attempting to dispose of Trust's
interest in Company. Company operates in a highly specialized niche market based
primarily out of City due to necessary proximity to Regulatory Agency, and all
companies that provide a significant volume of services similar to Company are also
located in the City metropolitan area.

The trustees of Trust initially offered to transfer Trust's interest in Company to Trust's
residuary beneficiary, Foundation. Foundation declined to accept the membership
interests in Company. The trustees next attempted to market and sell Trust's interest in
Company by approaching investment bankers and business opportunity brokers. Trust
represents that very few had interest in handling the sale, as they lacked the requisite
expertise with respect to Company's unique business, including its particular operations
and risks. After evaluating numerous potential entities, the trustees selected an entity to
handle the sale and entered into a formal written agreement. However, that written
agreement was executed at the same time that the COVID-19 pandemic began, which
led to a high degree of uncertainty in the commercial environment, particularly for this
type of niche transaction. Consequently, the trustees and the entity hired to s ell
Company concluded that it would not be fruitful to attempt to secure a buyer from
among an already depleted and limited group of potential purchasers due to the unique
nature of Company's business.

Notwithstanding this setback, the trustees continued searching for purchasers,
contacting major firms in adjacent industries to gauge their interest in expanding into
Company's business, but none were receptive. The trustees also contacted entities,
private equity investors, and entrepreneurs the trustees believed might be interested in
expanding their businesses, but none of them wanted to venture into an area where
neither they nor their business associates had prior experience. Trust also considered
selling its interest in Company to the two key employees who own a combined X%
interest in Company. However, the key employees did not then have the financial
resources to purchase the interest.

Trust represents that multiple factors have complicated efforts to sell its interest in
Company, including the need to protect confidential information, business uncertainty
resulting from and interest rate increases during the COVID-19 pandemic, and the fact
that many buyers are not interested in purchasing less than a majority interest in
Company. Trust also represents that the successor company would have to either
operate in City or establish an office there because a physical presence is necessary for
certain administrative reasons and in order to avoid certain risks. Because of the size,
value, nature, and complexity of Company as well as the unpredictable and unstable
economic conditions for the past three years, Trust has been unable to complete the
sale within the prescribed five-year period despite its diligent efforts to do so.

Trust submitted a plan for disposing of its excess business holdings to the State
Attorney General. The plan includes selecting a qualified independent appraiser to
value Company and entering into an agreement to market Company to prospective
purchasers. Trust will retain an investment banker to find a qualified buyer to purchase
the business of Company. Trust will request that the firm approach selected business
entities in the United States and elsewhere, which may have an interest in establishing
a new business in the United States, and approach selected individuals who are known
to invest in or acquire unusual business opportunities. If Trust is unable to sell after its
efforts have been exhausted during the next two years, Trust will attempt to reach an
agreement with the two key employees of Company who Trust expects to have
sufficient cash and financing to purchase the remaining interest in Company as a result
of receiving income distributions from Company over the next year or two. There are no
restrictions on Trust's ability to sell Company that would prevent a sale.

Trust's initial five-year period for disposing of excess business holdings under section
4943(c)(6) ends on Date 2. Trust submitted its request for an extension of time prior to
the end of the five-year period.

RULING REQUEST

Trust requests an extension for an additional five years of the period of time for
disposing of its excess business holdings under section 4943(c)(7) such that, during the
extension period, Trust's interest in Company will not be subject to the tax on excess
business holdings under section 4943(a)(1).

LAW

Section 170(c)(2)(B) provides in part that a charitable contribution is a contribution or
gift to or for the use of an organization organized and operated exclusively for religious,
charitable, scientific, literary, or educational purposes.

Section 4943(a)(1) imposes a tax on the value of excess business holdings of a 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)(2) generally 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.

Section 4943(c)(3)(A) provides, in part, that to determine the permitted holdings of a
private foundation in the case of a partnership or joint venture, "profits interest" shall be
substituted for "voting stock."

Section 4943(c)(6) generally 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 five-year period
beginning on the date of such change in holdings.

Section 4943(c)(7) provides that the Secretary may extend the 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)    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 such 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 described in clause (i) 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 Secretary any response received by
                    the private foundation during the five-year period, and
             (iii)  the Secretary determines that such plan can reasonably be
                    expected to be carried out before the close of the extension period.

Section 4943(d)(3) provides that a "business enterprise" does not include a trade or
business that derives at least 95 percent of its gross income from passive sources.

Section 4946(a)(1) provides in part that the term "disqualified person" with respect to a
private foundation includes:

      (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, or
      (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.

Section 4947(a)(1) provides that a trust which is not tax exempt under section 501(a),
all of the unexpired interests in which are devoted to one or more of the purposes
described in section 170(c)(2)(B), and for which a deduction was allowed under section
170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522, shall be treated as an organization
described in section 501(c)(3) for purposes of chapter 42 and certain other purposes.

Treas. Reg. § 53.4943-6(b)(1) provides generally 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 five-year period described in section 4943(c)(6) and in this section shall not
commence until the date on which the distribution of such holdings from the estate or
trust to the foundation occurs.

Treas. Reg. § 53.4947-1(a) provides that section 4947 subjects trusts which are not
exempt from taxation under section 501(a), all or part of the unexpired interests in which
are devoted to one or more of the purposes described in section 170(c)(2)(B), and
which have amounts in trust for which a deduction was allowed under section 170,
545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 to the same requirements and
restrictions that are imposed on private foundations. The basic purpose of section 4947
is to prevent these trusts from being used to avoid the requirements and restrictions
applicable to private foundations.

Treas. Reg. § 53.4947-1(b)(2)(iv) defines a reasonable period of settlement as that
period reasonably required (or if shorter, actually required) by the trustee to perform the
ordinary duties of administration necessary for the settlement of the trust.

Treas. Reg. § 53.4947-1(b)(2)(v) provides that a revocable trust that becomes
irrevocable upon the death of the decedent-grantor from which the trustee is required to
distribute all of the net assets in trust for or free of trust to charitable beneficiaries is not
considered a charitable trust under section 4947(a)(1) for a reasonable period of
settlement (within the meaning of Treas. Reg. § 53.4947-1(b)(2)(iv)) after becoming
irrevocable. After that period the trust is considered a charitable trust under section
4947(a)(1).

ANALYSIS

Trust is not recognized as exempt from federal income tax under section 501(a). During
the administration of Trustor's estate, Trust distributed specific bequests to
noncharitable beneficiaries. Since Date 1, the sole remaining beneficiary of Trust is
Foundation, which is an organization that is tax exempt as described in section
501(c)(3) and further classified as a private foundation under section 509(a).
Accordingly, the remaining unexpired interests in Trust are devoted to one or more of
the purposes described in section 170(c)(2)(B). Trust represents that it has amounts in
trust for which deductions have been allowed under section 2055 and section 642(c).
Therefore, Trust meets the requirements of section 4947(a)(1) to be treated as a
charitable trust described in section 501(c)(3) and is subject to the same requirements
and restrictions that are imposed on private foundations. See Treas. Reg. § 53.4947-1.

As of Date 1, Trust has held a Z% interest in Company. In addition, one of the trustees
of Trust, who is a disqualified person with respect to Trust under section 4946(a)(1), has
a Y% interest in Company. As a charitable trust subject to the requirements and
restrictions imposed on private foundations, Trust's permitted holdings in Company are
20% of the profits interest, reduced by the amount held by disqualified persons. See
section 4943(c)(2) and section 4943(c)(3)(a). Accordingly, Trust's Z% interest in
Company exceeds its permitted holdings and constitutes excess business holdings. See
section 4943(c)(1).

Trust represents that it became a section 4947(a)(1) nonexempt charitable trust (and
thus treated as a private foundation for purposes of section 4943) on Date 1, the date
Trust was no longer treated and taxed as part of Trustor's estate. We accept this
representation and find it generally consistent with the end of a reasonable period of
settlement as set forth in Treas. Reg. § 53.4947-1(b)(2)(v). Consequently, we find that
on Date 1 there was a change in Trust's holdings in a business enterprise (other than by
purchase), for purposes of section 4943(c)(6)(A) and that the five-year period described
in section 4943(c)(6)(A) commenced on Date 1. See Treas. Reg. § 53.4943-6(b)(1).

Trust held a Z% interest in Company, which represented substantially all of the fair
market value of all assets held by Trust. Company is a closely held company, with only
four holders of membership interests: Trust, two key employees of Company, and one
of the trustees of Trust. Company operates in an industry which is complex and highly
regulated. Therefore, the distribution from Trustor's estate to Trust of the business
holdings of Company represents an unusually large gift or bequest of holdings with a
complex corporate structure within the meaning of section 4943(c)(7).

Trust engaged in numerous efforts to sell its interest in Company within the five-year
period described in section 4943(c)(6). However, various factors complicated efforts to
sell Trust's interest in Company, including business uncertainty as a result of the
COVID-19 pandemic, the need for any successor company to operate in the City
metropolitan area, and the fact that many buyers are only interested in purchasing
100% of Company or at least a majority interest in Company.

Despite diligent efforts during the initial five-year period to dispose of Trust's excess
business holdings, disposition of those excess business holdings was not possible
during the initial five-year period, except at a price substantially below fair market value,
by reason of the size and diversity of such holdings. See section 4943(c)(7)(A)(ii).

Before the end of the initial five-year period, Trust submitted its request seeking an
additional five-year period within which to dispose of its excess business holdings in
Company. Trust's request includes its plan for disposing of the excess business
holdings during the requested extension period. Trust also submitted its plan to the
State Attorney General. See section 4943(c)(7)(B). Trust plans to enter into an
agreement to market Company to prospective purchasers in the United States and
internationally. In the event Trust is unable to sell Company through these marketing
efforts, Trust expects to be able to reach an agreement to sell its remaining interest in
Company to the two key employees of Company who currently own a combined X%
interest.

We have determined that Trust's plan to dispose of its excess business holdings in
Company received on Date 1 can reasonably be expected to be carried out before the
close of the extension period on Date 3.

RULING

Based on the facts and representations made by Trust, we have determined that Trust
meets the requirements under section 4943(c)(7) for an extension of an additional five
years to dispose of excess business holdings in Company. Consequently, Trust's
excess business holdings in Company will not be subject to tax under section
4943(a)(1) if Trust disposes of such excess business holdings before the close of the
five-year extension period on Date 3.

The ruling contained in this letter is based upon information and representations
submitted by or on behalf of Trust and accompanied by penalties of perjury statements
executed by individuals with authority to bind Trust 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. 2024-1, 2024-1 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 whether the period of administration or
settlement of the estate is reasonable or unduly prolonged within the meaning of Treas.
Reg. § 53.4947-1(b)(2)(iv). In addition, no opinion is expressed as to whether Trust's
assets other than Company are excepted from being a "business enterprise" under
section 4943(d)(3), nor is any opinion expressed regarding Trust's plan of disposition
beyond the ruling provided herein.

This ruling is directed only to the taxpayer requesting it. 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 Trust's authorized
representatives.

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,



                                          Matthew Giuliano
                                          Branch Chief
                                          (Exempt Organizations Branch 1
                                          Employee Benefits, Exempt Organizations, and
                                          Employment Taxes)


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