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Private Foundation Excess Business Holdings: Business Holdings on May 26, 1969

Transitional rules are provided to prevent holdings of a foundation as of May 26, 1969, that are greater than the 20 percent (or 35 percent) limits permitted under the general rules of Internal Revenue Code section 4943(c)(2), from being subject to the initial tax. The foundation is given time, in three phases, to dispose of its excess business holdings.

Separation of phases and special rules. A private foundation may acquire other interests in a business enterprise, which are also entitled to be treated as held by disqualified persons for varying holding periods (certain holdings acquired under the terms of a trust or will in effect on May 26, 1969, and the initial and additional 5-year periods to dispose of certain gifts, bequests, etc.). The phase periods for each different interest acquired work independently of one another. For example, the phases for certain holdings acquired under the terms of a trust or will in effect on May 26, 1969, start independently from those for certain other interests of the foundation in the same enterprise. In any case, however, holdings the private foundation disposes of are charged first against those holdings it must dispose of in the shortest period to avoid the initial tax thereon.

In certain situations, holdings during the phase periods may become so reduced that they would be permitted holdings subject to the general rules of section 4943 instead of the transitional rules.  For example, when the combined voting levels have been reduced to 20 percent, the provisions concerning nonvoting stock as permitted holdings generally apply.

See Exception, for discussion of a limited exception from the self-dealing rules that applies when disposing of business holdings would otherwise be taxable.


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Page Last Reviewed or Updated: 21-Aug-2014