Private foundation gets an extra five years to sell "excess business holdings" inherited from its founder

Plain-English summary

A private foundation cannot hold too large a stake in a business (an "excess business holding") without facing an excise tax under Section 4943, and it normally has five years to sell down after receiving such a stake by gift or bequest. Here, a foundation inherited a one-third interest in a complex, diversified company (its largest-ever non-cash gift) from its founder's estate, and the founder's son, a disqualified person, owned the rest. The foundation could not sell its non-controlling interest during the initial five years without accepting a steep discount, so it and the other owner instead liquidated the company piece by piece; only two real estate properties remained when the period ran out. Section 4943(c)(7) lets the IRS grant one additional five-year period for an unusually large or complex gift when the foundation made diligent disposal efforts, could not sell within the first five years except at a price far below value, and timely filed a disposition plan with the IRS and the state attorney general. The IRS found all those conditions met, granted the extra five years, and confirmed the holdings will not trigger the Section 4943(a)(1) tax if disposed of before the extension ends.

Ruling snapshot

• Question: May a private foundation get an additional five-year period under Section 4943(c)(7) to dispose of excess business holdings inherited from its founder's estate?
• Outcome: approved (additional five years granted; no Section 4943(a)(1) tax if it disposes within the period)
• Key authorities: IRC § 4943(a)(1), (c)(1), (c)(6), (c)(7); Treas. Reg. § 53.4943-6

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202503009                                              Third Party Communication: None
Release Date: 1/17/2025                                        Date of Communication: Not Applicable
Index Number: 4943.00-00
                                                               Person To Contact:
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                                                               Refer Reply To:
                                                               CC:EEE:EOET:EO3
                                                               PLR-108891-24
                                                               Date:
                                                               October 21, 2024



Taxpayer       =    ----------------------------------
Founder        =    ------------------
Company        =    -------------------------------
Son            =    -------------------
State          =    -------------
State 2        =    ----------
Date 1         =    ------------------
Date 2         =    -----------------------
Date 3         =    -----------------------
LLC 1          =    ------------------------------------------------
LLC 2          =    ------------------------------
LLC 3          =    ------------------------------
LLC 4          =    -------------------------
LLC 5          =    ------------------------------------------------
X              =    ---------------
Y              =    -------------

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

This letter responds to a letter from your authorized representative, dated January 31,
2024, and subsequent documentation dated August 27, 2024, September 6, 2024, and
October 11, 2024, requesting an additional five years under section 4943(c)(7) of the
Internal Revenue Code (Code)1 to dispose of certain excess business holdings.
Taxpayer represents the facts as follows.




1 Section references are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated.
PLR-108891-24                                 2

FACTS

Taxpayer was incorporated as a State nonprofit corporation on Date 1. Taxpayer is
exempt from federal income tax under section 501(a) as an organization described in
section 501(c)(3) and is classified as a private foundation under section 509.

Founder created Taxpayer as part of Founder’s estate planning activities. On Date 2,
Founder’s estate transferred a 33.33 percent membership interest in Company to
Taxpayer. Taxpayer states that the membership interest is the largest gift of a non-cash
asset it has ever received, valued at $X as of Date 2. Taxpayer acknowledges that the
membership interest constitutes excess business holdings under section 4943(c)(1),
and it states that the section 4943(c)(6) initial five-year period for disposing of those
excess business holdings expired on Date 3. At the time of Founder’s death, Founder’s
son, Son, held the remaining membership interest in Company. Son is a disqualified
person under section 4946.

Company is a State 2 limited liability company that is treated as a partnership for federal
tax purposes. Taxpayer claims that at the time it received its membership interest in
Company, Company was complex and diversified, holding various assets, including
LLC 1, LLC 2, and LLC 3. LLC 1, LLC 2, and LLC 3 are State 2 limited liability
companies. Company is the sole member of LLC 1, LLC 2, and LLC 3. LLC 1 operates
as the property manager for certain properties located in State 2. LLC 2’s primary asset
on Date 2 was a 100 percent membership interest in LLC 4, the primary asset of which
was an office building located in State 2. As of Date 2, LLC 3 held various real estate
holdings and a 100 percent membership interest in LLC 5, which itself owned a golf
course. LLC 4 and LLC 5 were also State 2 limited liability companies.

Taxpayer represents that it made diligent efforts to dispose of its interest in Company
throughout the section 4943(c)(6) initial five-year period. Taxpayer initially sought to sell
its interest, but it soon realized that, because of Company’s size and complexity, it could
not find a buyer that would pay for its non-controlling interest without a significant
discount from the value of the underlying assets. Consequently, Taxpayer, Company,
and Son decided to liquidate Company in its entirety. During the initial five-year period,
Company liquidated most of its assets. All that remained were two of the separate real
estate properties held by LLC 3. On Date 3, as a result of the liquidation efforts, the
approximate fair market value of Taxpayer’s membership interest was $Y. During the
initial five-year period, Company actively marketed the remaining two real estate assets,
engaging in advanced discussions with potential buyers, but various factors prevented
finalizing both sales.

Prior to the end of the initial five-year period under section 4943(c)(6), Taxpayer
submitted a request to the Internal Revenue Service for an extension of five years to
dispose of its excess business holdings pursuant to section 4943(c)(7). Taxpayer also
submitted its plan of disposition to the State 2 attorney general. The plan involves
PLR-108891-24                                  3

winding down Company following the disposition of the remaining two real estate
properties held by LLC 3.

RULING REQUESTS

Taxpayer requests a ruling granting it an additional five-year period to dispose of its
excess business holdings in Company under section 4943(c)(7).

Taxpayer also seeks confirmation that its interest in Company will not be taxed under
section 4943(a)(1) during the extension period.

LAW

Section 4943(a)(1) imposes a tax on the excess business holdings of a private
foundation.

Section 4943(c)(1) provides that the term “excess business holdings” means the
amount of stock or other interest in a business enterprise that the foundation would
have to dispose of to a person other than a disqualified person for the foundation’s
remaining holdings in such enterprise to be permitted holdings.

Section 4943(c)(2)(A) provides that the permitted holdings of a private foundation in an
incorporated business enterprise are 20 percent of the voting stock, reduced by the
percentage of voting stock in the enterprise owned by all the foundation’s disqualified
persons. In any case in which all disqualified persons together do not own more than
20 percent of the voting stock of an incorporated business enterprise, nonvoting stock
held by the private foundation is also treated as permitted holdings.

Section 4943(c)(3)(A) provides that, for purposes of section 4943(c)(2), “profits interest”
is substituted for “voting stock,” and “capital interest” is substituted for “nonvoting stock,”
when the enterprise is a partnership or joint venture.

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.

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—
PLR-108891-24                                4

   (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 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
              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 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.

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

ANALYSIS

Taxpayer received its membership interest in Company from Founder’s estate.
Taxpayer’s ownership of Company constitutes excess business holdings under section
4943(c)(1), and Taxpayer received the membership interest other than by purchase by
Taxpayer or by disqualified persons with respect to Taxpayer. As a result, section
4943(c)(6) provided Taxpayer with an initial five-year period to dispose of its excess
business holdings, which ended on Date 3.

Taxpayer’s membership interest in Company is the largest gift of a non-cash asset it
has ever received. Company was (and has been) a complex and diversified company.
Accordingly, Taxpayer’s receipt of its membership interest represents an unusually
large gift or bequest of diverse business holdings or holdings with complex corporate
structures within the meaning of section 4943(c)(7).

Taxpayer made diligent efforts to dispose of its excess business holdings in Company,
as required by section 4943(c)(7)(A)(i). After Taxpayer was not able to find a buyer that
would pay for its non-controlling membership interest in Company without a significant
discount from the underlying value of the assets, Taxpayer, Company, and Son agreed
to liquidate Company. During the initial five-year period, Company disposed of nearly
all its assets, reducing the fair market value of Taxpayer’s interest by roughly 50 percent
PLR-108891-24                                  5

as of Date 3. Company actively marketed the two remaining properties, engaging in
multiple sale negotiations. Because disposition of Taxpayer’s excess business holdings
in Company was not possible within the initial five-year period (except at a price
substantially below fair market value) by reason of the size and complexity or diversity
of such holdings, Taxpayer meets the requirements of section 4943(c)(7)(A)(ii).

Before the close of the initial five-year period, Taxpayer submitted its request to the
Internal Revenue Service under section 4943(c)(7), seeking an additional five-year
period within which to dispose of its excess business holdings in Company. Taxpayer
also submitted its plan to the State 2 attorney general.

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 Company can
reasonably be expected to be carried out before the close of the extension period.
Accordingly, we conclude that Taxpayer satisfies the requirements under section
4943(c)(7) for an extension of an additional five years to dispose of the excess business
holdings, and Taxpayer’s excess business holdings in Company will not be subject to
tax under section 4943(a)(1) if Taxpayer disposes of them before the close of the
extension period.

The ruling contained in this letter is based on information and representations submitted
by or on behalf of Taxpayer and accompanied by a penalty of perjury statement
executed by an appropriate party, and on the understanding that there will be no
material changes in the facts described above. While this office has not verified any of
the material submitted in support of the request for a ruling, the material is subject to
verification upon examination. The Associate office 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, section 11.05.

This letter does not address the applicability of any section of the Code or Treasury
Regulations to the facts submitted other than with respect to the sections specifically
described, and, except as expressly provided in this letter, no opinion is expressed or
implied concerning the tax consequences of any aspect of any transaction or item of
income discussed or referenced in this letter.

This ruling is directed only to Taxpayer. 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 Taxpayer’s authorized representative.
PLR-108891-24                                             6


A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, if Taxpayer files its returns electronically, Taxpayer may satisfy this
requirement by attaching a statement to its return that provides the date and control
number of this letter.




                                                       Sincerely,




                                                       Kenneth M. Griffin
                                                       Branch Chief
                                                       Exempt Organizations Branch 3
                                                       (Employee Benefits, Exempt Organizations,
                                                       and Employment Taxes)



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