The Bipartisan Budget Act of 2018, which President Trump signed on Feb. 9, 2018, has potentially created a new opportunity for individuals interested in charitable and philanthropic planning, as the bill creates a limited exception from the private foundation excess business holdings excise tax under Section 4943 of the Internal Revenue Code.
Prior to the enactment of the new law, private foundations were only permitted to hold certain amounts of stock or other interests in business enterprises, and any holdings beyond that amount were treated as excess business holdings, to which the private foundations would be subject to an excise tax.
The new law effectively exempts private foundations from excess business holdings tax in any business enterprise for which (1) the private foundation holds 100% of the voting stock in the business enterprise at all times during the taxable year; (2) all of the private foundation’s ownership interest in the business enterprise was acquired by means other than by purchase; (3) the net operating income of the business enterprise is distributed to the private foundation on a yearly basis; and (4) the business enterprise operates “independently” of the private foundation. The exception provided by the new law does not extend to donor advised funds and certain supporting organizations.
The new law is called the “Newman’s Own Exception” due to the fact that it is generally recognized to be the result of an active lobbying effort by Newman’s Own Foundation, a private foundation established by the actor Paul Newman that wholly-owns a for-profit food company. Upon Paul Newman’s death in 2008, he left the company to a private foundation which would have been subject to excise tax without the passage of the new law.
This new exception could provide a creative opportunity for business ownership to be transferred to a private foundation by a Last Will and Testament without the ownership of such business later being broken up to avoid exposure to excise tax. Note, however, it is likely that the Internal Revenue Service will issue regulations to prevent exploitation of the new law, as the prior law was put in place specifically to prevent wealthy business owners from using private foundations as tax shelters for their business interests. It will be interesting to see how the IRS sees fit to deal with this complex matter. Time will tell!