IRC Section 4943(c)(7), Extension of Period to Dispose of Certain Assets


Section 4943 limits the involvement of a private foundation in the active conduct of a business enterprise by imposing tax on its excess business holdings. Generally, a foundation has five years to dispose of excess holdings arising other than from purchase. This Issue Snapshot explores the Service's authority to grant discretionary five-year extensions of the initial five-year disposition period.

IRC Section and Treas. Regulation

  • IRC Section 4943(a) Initial tax
  • IRC Section 4943(c)(1) Excess business holdings
  • IRC Section 4943(c)(2) Permitted holdings in a corporation
  • IRC Section 4943(c)(3) Permitted holdings in partnerships, etc.
  • IRC Section 4943(c)(6) 5-year period to dispose of gifts, bequests, etc.
  • IRC Section 4943(c)(7) 5-year extension of period to dispose of certain large gifts and bequests
  • IRC Section 4943(d) Definitions; special rules
  • Treas. Regs. Section 53.4943-10 Business enterprise; definition

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)

TRG 60.6 – Five-Year Extension of Initial Five-Year Disposition Period

IRC Section 4943 – Taxes on Excess Business Holdings

Reducing Private Foundation Excess Business Holdings: Additional Time to Dispose of Large Gifts or Bequests discusses the information required to be submitted with requests for extensions under Section 4943(c)(7). This information is also available in Section 4943(c)(7).


How can a private foundation obtain an extension of time to reduce excess business holdings to permissible levels and avoid excise tax imposed under IRC Section 4943?

Section 4943(a) imposes an initial 10 percent tax on the value of any "excess business holdings" of a private foundation in a "business enterprise." (For purposes of Section 4943, the term "private foundation" includes donor advised funds and certain Type II and III supporting organizations. See Section 4943(e)-(f)). Any excess business holdings remaining at the close of the taxable period are subject to the second-tier excise tax at a rate of 200 percent of the value of the excess business holdings under Section 4943(b).

"Business enterprise," as defined in Treas. Reg. Section 53.4943-10(a)(1), means any activity which is regularly carried on for the production of income from the sale of goods or the performance of services and which constitutes an unrelated trade or business under Section 513. It does not include certain program-related activities (e.g., a functionally related business as defined in Section 4942(j)(4) or program-related investments as defined in Section 4944(c)) or a trade or business at least 95 percent of the gross income of which is derived from passive sources. See Section 4943(d)(3) and Treas. Reg. Section 53.4943-10 for more information.

The term "excess business holdings" is defined in Section 4943(c)(1) as the amount of stock or other interest in the enterprise a foundation would have to dispose of (to a person other than a disqualified person) for the remaining holdings of the foundation to be permitted holdings. Generally, under Section 4943(c)(2)(A) and 4943(c)(3)(A), a foundation is permitted to hold twenty percent of an interest in a business enterprise (such as voting stock in a corporation or profits interest in a partnership), reduced by the amount held by disqualified persons. Any excess holdings constitute excess business holdings for purposes of Section 4943. Excess business holdings acquired other than by purchase (e.g., by contribution) are treated as held by a disqualified person (rather than the foundation) for a five-year period beginning on the date such holdings were acquired by the foundation. See Section 4943(c)(6)(A). Section 4943(c)(6)(B) sets forth a similar rule for a change in holdings which causes an increase in excess business holdings. Note, however, that Section 4943(g) provides an exception for certain limited holdings to independently operated businesses which meet the requirements of Section 4943(g)(2), (3), and (4). See Section 4943(g) for more information on this exception. See Section 4943 for more information on permitted holdings, which are also discussed in detail in the IRC Section 4943 – Taxes on Excess Business Holdings Issue Snapshot.

When the excess business holdings provisions of Section 4943(a) apply, Section 4943(c)(7) provides that the Service may extend the five-year disposition period under Section 4943(c)(6) for an additional five years where there is an unusually large gift or bequest of diverse business holdings or holdings with complex corporate structures if:

  1. the foundation establishes that-
    1. diligent efforts to dispose of the holdings have been made within the initial 5-year period and
    2. disposition within the initial 5-year period has not been possible (except at a price substantially below fair market value) by reason of the size and complexity or diversity of the holdings.
  2. before the close of the initial 5-year period-
    1. the foundation submits to the Service a plan for disposing of the excess business holdings involved in the extension, and
    2. the foundation submits the plan to the appropriate state official (e.g., Attorney General) and forwards any response thereto to the Service; and
  3. the Service determines the plan reasonably can be expected to be carried out before the close of the extension period.

Example: Foundation 2 was one of two successors in interest to the assets of Foundation 1, a dissolved entity that had received a distribution from Trust which included complex holdings. After receiving that distribution, Foundation 1 was restructured into Foundations 2 and 3, the latter of which then received interests in certain business enterprises that owned real estate that was being developed. Such distributions were treated as having been acquired other than by purchase. Due to the state of the real estate market and other factors, Foundation 2 was concerned about its ability to dispose of the interests, which were Section 4943 excess business holdings. The IRS granted an extension of the deadline for disposition thereof. Noting the criteria that had to be satisfied to extend the disposition deadline, the IRS held, inter alia, that Foundation 2 had made diligent efforts to dispose of the holdings but that such efforts had not been successful due at least in part to the size and complexity of the holdings. Foundation 2 thus was properly granted an additional five-year period within which to dispose of the interests. See PLR 201510056. Note: PLRs cannot be cited as precedent.

Example: Foundation received a bequest of 100 percent of stock in Corporation. Stock represented an excess business holding for foundation. At time of testator's death, Corporation operated various retail stores and warehouses. Since testator's death, substantial efforts were made to improve Corporation's marketability. However, due to Corporation's complex nature and the current economic conditions, it could not dispose of the excess business holdings except at a price substantially below fair market value. Corporation was being restructured and an investment management firm was employed to help market the stock and was in negotiations with a prospective buyer. IRS granted relief finding that the plan to dispose of the excess business holding within the additional five-year period can reasonably be expected to be carried out. See PLR 201329027.

Requesting approval of an extension

A request for extension of the period for disposition, as well as a copy of any response received from state officials, should be submitted as a private letter ruling request to the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). To request the ruling, the foundation must follow the instructions in Revenue Procedure 2020-1 (updated annually) and pay the required user fee. The current user fee amount can be found in Appendix A (schedule of user fees) of Revenue Procedure 2020-1.

Issue Indicators or Audit Tips

  • Review Part VII-B of Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation, for reporting of excess business holdings.
  • The five-year disposition period starts the date the business interest or stock is contributed.
  • Extensions should be substantiated by proof of IRS approval.
  • If a foundation fails to establish that an extension was approved, seek to impose the Section 4943 excise taxes.