Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-25

1975-1 C.B. 359

Sec. 4941

IRS Headnote

Private foundation's self-dealing; excess business holdings. In the proposed sale to a disqualified person of a private foundation's 15 percent interest in a corporation, in which the foundation and all disqualified persons with respect to the foundation have combined holdings of 45 percent of the voting stock as of May 26, 1969, the disqualified person would be subject to the tax on self-dealing imposed by section 4941 of the Code; in a similar situation in which the total combined holdings of the foundation and disqualified persons are 55 percent, the foundation has excess business holdings under section 4943(c)(4), and section 101(1)(2)(B) of the Tax Reform Act of 1969 would apply to except the proposed sale from the provisions of section 4941.

Full Text

Rev. Rul. 75-25 [fn1]

Advice has been requested whether private foundations may sell their business holdings under the circumstances described below without taxes being imposed on disqualified persons with respect to such private foundations under section 4941 of the Internal Revenue Code of 1954.

Situation 1. On May 26, 1969, and continuously thereafter, Private Foundation M held 15 percent and disqualified persons with respect to the foundation held 30 percent of the voting stock of Corporation X, for total combined holdings of 45 percent. Private Foundation M proposes to sell its 15 percent interest in Corporation X on January 2, 1975, to A, a disqualified person.

Situation 2. On May 26, 1969, and continuously thereafter, Private Foundation N held 15 percent and disqualified persons with respect to the foundation held 40 percent of the voting stock of Corporation Y, for total combined holdings of 55 percent. Private Foundation N proposes to sell its 15 percent interest in Corporation Y on January 2, 1975, to B, a disqualified person.

Section 101(1)(2)(B) of the Tax Reform Act of 1969 provides that section 4941 of the Code shall not apply to the sale, exchange, or other disposition of a private foundation's business holdings to a disqualified person if the private foundation is required to dispose of such property in order not to be liable for tax under section 4943 and if the private foundation receives in return an amount which equals or exceeds the fair market value of the property in a transaction which is not a prohibited transaction within the meaning of section 503(b). It further provides that section 4943(c)(4) shall not be taken into account if the sale, exchange, or other disposition is made before January 1, 1975.

Section 53.4941(d)-4(b)(1) of the Foundation Excise Tax Regulations provides that the determination of whether a private foundation is required to dispose of property in order not to be liable for tax under section 4943 is to be made without regard to section 4943(c)(2)(C) (relating to the 2 percent de minimis rule) and as if every disposition by the foundation were made to a disqualified person.

Section 4943(a)(1) of the Code imposes a tax on the excess business holdings of a private foundation equal to 5 percent of the value of such holdings.

Section 4943(c)(1) of the Code states that "excess business holdings" is 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 its remaining holdings to be "permitted holdings."

Section 4943(c)(2) of the Code provides generally 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 held by all of the foundation's disqualified persons.

Section 4943(c)(4) of the Code provides special rules in cases where the combined holdings of a private foundation and its disqualified persons in a business enterprise on May 26, 1969, exceeded 20 percent of the voting stock. With respect to such cases, section 4943(c)(4)(A) provides generally that the permitted percentage of business holdings will be equal to the combined holdings of the private foundation and its disqualified persons on May 26, 1969, subject however to the limitation that such permitted percentage in any event will not exceed 50 percent. (In the event of a decrease in holdings with respect to business holdings on May 26, 1969, the permitted percentage is subject to further limitations not material here.) Thus, if a private foundation had an interest in a business corporation on May 26, 1969, and the combined holdings of the private foundation and its disqualified persons in the voting stock of such corporation amounted to more than 50 percent, the private foundation would be in an excess business holdings position for purposes of section 101(1)(2)(B) of the Tax Reform Act.

Section 4943(c)(4)(B) of the Code provides that if, as of May 26, 1969, any interest of a private foundation constitutes excess business holdings (determined under the permitted percentages of section 4943(c)(4)(A), all of the private foundation's holdings are treated as held by a disqualified person for a 20, 15, or 10 year period (whichever applies, depending upon the holdings of the parties on May 26, 1969). Section 4943(c)(4)(B) thus provides a grace period which effectively suspends imposition of the excess business holdings tax to permit private foundations to make orderly dispositions of the May 26, 1969 holdings in cases where the permitted percentage is exceeded.

The date of the proposed sales in both Situation 1 and Situation 2 is January 2, 1975. This date is not before the January 1, 1975, date provided in section 101(1)(2)(B) of the Tax Reform Act. Therefore, the special rules of section 4943(c)(4) of the Code must be taken into account in determining whether the foundations are in an excess business holdings position.

In Situation 1, Private Foundation M and all disqualified persons have combined holdings in Corporation X of 45 percent. This percentage does not exceed the 50 percent limitation on permitted holdings provided in section 4943(c)(4) of the Code. Therefore, the foundation is not in an excess business holdings position for purposes of section 101(1)(2)(B) of the Tax Reform Act and is not required to dispose of any of its holdings in Corporation X in order not to be liable for tax under section 4943. Accordingly, section 101(1)(2)(B) would not apply to except the proposed sale from the provisions of section 4941 and A would be subject to the self-dealing tax imposed by section 4941. However, if Private Foundation M held 30 percent and disqualified persons with respect to the foundation held 15 percent of the voting stock of Corporation X, section 101(1)(2)(B) would apply to except the sale of 5 percent of the stock from the provisions of section 4941.

In Situation 2, Private Foundation N and all disqualified persons have combined holdings in Corporation Y of 55 percent. This percentage exceeds the 50 percent limitation on permitted holdings provided in section 4943(c)(4) of the Code. Therefore, the foundation is in an excess business holdings position under section 4943(c)(4) even though it will not be subject to tax on these excess business holdings during the period specified in section 4943(c)(4)(B). The foundation must dispose of its excess business holdings in Corporation Y prior to the end of the section 4943(c)(4)(B) period in order not to be liable for tax under section 4943. Accordingly, section 101(1)(2)(B) of the Tax Reform Act would apply to except the proposed sale from the provisions of section 4941 and B would not be subject to the self-dealing tax imposed by section 4941.

Since the holdings of Private Foundation N and its disqualified persons are aggregated in determining the private foundation's excess business holdings position, if any portion of the holdings are sold to its disqualified persons, it would remain in an excess business holdings position for purposes of section 101(1)(2)(B) until the last scintilla of such holdings are sold. Therefore, the entire holdings of Private Foundation N in Corporation Y are excess business holdings and may be disposed of under the exception to section 4941(a) tax provided in section 101(1)(2)(B) of the Tax Reform Act.

[fn1] Also released as TIR-1326, dated Dec. 30, 1974.