July 25, 2010
Authored by: Keith Kehrer
The excess business holdings rules (IRC Section 4943) limit the stock a private foundation may hold to 20 percent of a corporation’s voting stock less stock held by its disqualified persons (including trustees, directors, officers, and their family members). A special rule gives a private foundation five years to dispose of any stock that constitutes an excess business holding if it was acquired by gift. In light of the current economy, private foundations may find it difficult to dispose of excess business holdings within this five year period without selling for a substantial discount.
Fortunately, an additional five years may be granted if (1) the foundation made diligent efforts to dispose of the stock, (2) disposition within the initial 5-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, (3) prior to the expiration of the initial 5-year period, the private foundation submits to the IRS and relevant Attorney General a plan for disposing of all of the excess business holdings involved in the extension, and (4) the IRS determines that such plan can reasonably be expected to be carried out before the close of the extension period. In Priv. Ltr. Rul. 201028044, the IRS granted a 5-year extension to a private foundation where the value of its stock had declined by more than 50% and the timing of the foundation’s disposition was affected by federal securities laws. In light of the stock market decline, numerous private foundations may currently be in a similar position. Private foundations faced with the pending deadline to reduce its excess business holdings should expl0re prior to the expiration of the initial 5-year period whether an additional 5-year extension may be available.