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themselves. Enter in column (c) the tax

supporting organizations in a business

charities/foundations/index.html for

to be paid by each foundation manager.

enterprise on page 9.

more information.

Requirement. If you answered “Yes”

Carry the total amount in column (d)

Sole proprietorships. In general, a

to Form 990-PF, Part VII-B, question

for each foundation manager to page 1,

private foundation may not have any

3b; Form 990, Part VI, question 89g; or

Part II-A, column (c).

permitted holdings in a business

Form 5227, Part VI-B, question 3b,

enterprise that is a sole proprietorship.

complete a Schedule C for each

For exceptions, go to

business enterprise in which the

Schedule B—Initial Tax

charities/foundations/index.html. For a

foundation had excess business

definition of sole proprietorship, see

on Undistributed Income

holdings for its tax year beginning in

Regulations section 53.4943-10(e).

2006.

(Section 4942)

Corporate voting stock. This stock

Taxes. A private foundation that has

entitles a person to vote for the election

Complete Schedule B if you answered

excess holdings in a business

of directors. Treasury stock and stock

“Yes” to Form 990-PF, Part VII-B,

enterprise may become liable for an

that is authorized but unissued is not

question 2b.

excise tax based on the amount of

voting stock for these purposes. See

holdings. The initial tax is 10% (5% for

An initial excise tax of 30% (15% for

Regulations sections 53.4943-3(b)(1)(ii)

tax years beginning before August 18,

and 53.4943-3(b)(2)(ii).

2006) of the value of the excess

2006) is imposed on a private

holdings and is imposed on the last day

For a partnership (including a limited

foundation’s undistributed income on

of each tax year that ends during the

partnership) or joint venture, the term

the first day of the second or any

taxable period. The excess holdings are

“profits interest” should be substituted

succeeding tax year after the tax year

determined on the day during the tax

for “voting stock.” For any

in connection with which income

year when they were the largest.

unincorporated business enterprise that

remains undistributed.

is not a partnership, joint venture, or

If the foundation keeps the excess

Use the 2006 Form 4720 to report

sole proprietorship, the term “beneficial

business holdings after the initial tax

the initial tax on undistributed income

interest” should be substituted for

has been imposed, it becomes liable for

for tax years beginning in 2005 or

“voting stock.” See Regulations section

an additional tax of 200% of the

earlier that remains undistributed at the

53.4943-3(c).

remaining excess business holdings

end of the foundation’s current tax year

unless it disposes of them within the

Nonvoting stock. Corporate equity

beginning in 2006. The initial tax will

taxable period. However, if the

interests that do not have voting power

not apply to a private foundation’s

foundation disposes of its excess

should be classified as nonvoting stock.

undistributed income:

•

business holdings during the correction

Evidences of indebtedness (including

For any tax year it is an operating

period, the additional tax will not be

convertible indebtedness), warrants,

foundation (as defined in section

assessed or, if assessed, will be abated

and other options or rights to acquire

4942(j)(3) and related regulations or in

and if collected, will be credited or

stock should not be considered equity

section 4942(j)(5)), or

•

refunded. For information on the

interests. See Regulations section

To the extent it did not distribute an

correction period go to

53.4943-3(b)(2).

amount solely because of an incorrect

charities/foundations/index.html.

valuation of assets, provided the

For a partnership (including a limited

Business enterprise. In general, this

foundation satisfies the requirements of

partnership) or joint venture, the term

means the active conduct of a trade or

section 4942(a)(2), or

“capital interest” should be substituted

•

business, including any activity

For any year for which the initial tax

for “nonvoting stock.” For any

regularly conducted to produce income

was previously assessed or a notice of

unincorporated business that is not a

from selling goods or performing

deficiency was issued.

partnership, joint venture, or sole

services, that is an unrelated trade or

Do not complete Schedule B for any

proprietorship, references to nonvoting

business described in section 513.

year for which any of the above

stock do not apply for computation of

The term “business enterprise” does

provisions apply to the undistributed

permitted holdings. See Regulations

not include a functionally related

income.

section 53.4943-3(c)(4).

business as defined in section

Attribution of business holdings. In

4942(j)(4). In addition, business

determining the holdings in a business

holdings do not include program-related

Schedule C—Initial Tax

enterprise of either a private foundation

investments (such as investments in

or a disqualified person, any stock or

on Excess Business

small businesses in economically

other interest owned directly or

depressed areas or in corporations to

Holdings (Section 4943)

indirectly by or for a corporation,

assist in neighborhood renovations) as

partnership, estate, or trust is

defined in section 4944(c) and related

considered owned proportionately by or

General Instructions

regulations. Also, business enterprise

for its shareholders, partners, or

does not include a trade or business at

Private foundations are generally not

beneficiaries. In general, this rule does

least 95% of the gross income of which

permitted to hold more than a 20%

not apply to certain income interests or

comes from passive sources. Log on to

interest in an unrelated business

remainder interests of a private

charities/foundations/

enterprise. They may be subject to an

foundation in a split-interest trust

index.html.

excise tax on the amount of any excess

described in section 4947(a)(2). See

holdings. For purposes of section 4943,

Excess business holdings. Excess

Regulations section 53.4943-8.

for tax years beginning after August 17,

business holdings is the amount of

2006, donor advised funds and certain

stock or other interest in a business

Taxable period. The taxable period

supporting organizations are

enterprise that the foundation would

begins on the first day the foundation

considered private foundations. For

have to dispose of to a person other

has excess business holdings and ends

more information on the applicability of

than a disqualified person in order for

on the earliest of:

•

Schedule C to such organizations, see

the foundation’s remaining holdings in

The mailing date of a notice of

General rules on the permitted holdings

the enterprise to be permitted holdings

deficiency, under section 6212, in

of donor advised funds and certain

(section 4943(c)(1)). Go to

connection with the initial tax on excess

-7-

Form 4720 Instructions

Instructions For Form 4720 - Return Of Certain Excise Taxes On Charities And Other Persons - Department Of The Treasury - 2006 Page 7

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