On February 9, 2018, the Philanthropic Enterprise Act of 2017 (the “Act”) was signed into law as part of the Bipartisan Budget Act of 2018. The Act addresses excess business holdings and allows private foundations to own for-profit businesses in certain circumstances. Under the prior law, such ownership was forbidden, which was in place for public policy reasons to prevent families from establishing private foundations to serve as tax shelters for their business interests.
The Act, which became effective as of 2018, now makes up I.R.C. §4943(g). In general, Section 4943 imposes the “excess business holdings” rule on private foundations, which is triggered when a private foundation and its disqualified persons (e.g., substantial contributors, directors, officers and their family members and businesses) own more than 20% in the aggregate of a for-profit business. The Act creates an exception for a private foundation to own a for-profit business, so long as the following requirements are met:
- 100 percent of the voting stock in the business must be held by the private foundation;
- The private foundation must have acquired the ownership interest in the business by means other than by purchase;
- All of the profits of the business must be distributed to the private foundation;
- The private foundation cannot be controlled by a disqualified person (e.g., the family members of the creator of the private foundation or any substantial contributors of the private foundation, or a director, officer, trustee, manager, employee, or contractor of the business);
- At least a majority of the foundation’s board are persons that are not directors or officers of the business or family members of a substantial contributor; and
- There is no outstanding loan from the business to a substantial contributor or his or her family members.
The Act is known as the “Newman’s Own Exception” because Newman’s Own Foundation had been lobbying for this exception since the death of the foundation’s founder, Paul Newman, in 2008. Newman left his entire interest in Newman’s Own, Inc. to his foundation and under the prior rules, the foundation was required to divest itself of the company within the 10-year extended grace period (which would have expired in November 2018). Under the Act, the foundation will now be able to retain ownership of the company.