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The term “business enterprise” does not

The date the initial tax on excess business

time without being subject to the tax on excess

include a functionally related business as

holdings related to those holdings is assessed.

business holdings.

defined in section 4942(j)(4). In addition,

When a notice of deficiency is not mailed

During the first phase, no excess business

business holdings do not include

because the restrictions on assessment and

holdings tax was imposed on a private

program-related investments (such as

collection are waived or because the deficiency

foundation for interests held since May 26,

investments in small businesses in

is paid, the date of filing the waiver or the date

1969, if the foundation had excess holdings on

economically depressed areas or in

of paying the tax, respectively, will be treated

that date. The first phase is:

corporations to assist in neighborhood

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as the end of the taxable period. See

A 20-year period beginning on May 26,

renovations) as defined in section 4944(c) and

Regulations section 53.4943-9.

1969, if on that date the foundation and all

related regulations. Also, business enterprise

disqualified persons held more than a 95%

Exceptions to Tax on Excess Business

does not include a trade or business at least

voting interest in the enterprise (the 20-year

Holdings

95% of the gross income of which comes from

first phase expired on May 25, 1989);

passive sources. See Pub. 578.

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2% De minimis rule. A private foundation will

A 15-year period beginning on May 26,

Excess business holdings. Excess business

not be treated as having excess business

1969, if on that date the foundation and all

holdings is the amount of stock or other

holdings in any enterprise in which it, together

disqualified persons together had more than a

interest in a business enterprise that the

with related foundations as described in the

75% voting stock interest (or more than a 75%

foundation would have to dispose of to a

instructions for Form 990-PF (under the

profits or beneficial interest of any

person other than a disqualified person in order

definition for “disqualified person” in the

unincorporated business), or more than a 75%

for the foundation’s remaining holdings in the

General Instructions) owns not more than 2%

interest in the value of all outstanding shares of

enterprise to be permitted holdings (section

of the voting stock and not more than 2% in

all classes of stock (or more than a 75% capital

4943(c)(1)). See Pub. 578.

value of all outstanding shares of all classes of

interest of a partnership or joint venture) in the

stock.

enterprise (the 15-year first phase expired on

Sole proprietorships. In general, a private

May 25, 1984); and

Disposition of excess business holdings

foundation may not have any permitted

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A 10-year period beginning on May 26,

within 90 days. Generally, when a private

holdings in a business enterprise that is a sole

1969, in all other cases in which the foundation

proprietorship. For exceptions, see Pub. 578,

foundation acquires excess business holdings

had excess business holdings on May 26,

other than as a result of purchase by the

Chapter X. For a definition of sole

1969. The 10-year first phase expired on May

foundation (such as an acquisition by a

proprietorship, see Regulations section

25, 1979.

53.4943-10(e).

disqualified person), the foundation will not be

taxed on those excess holdings if it disposes of

During the second phase (the 15-year

Corporate voting stock. This stock entitles a

enough of them so that it no longer has an

period after the first phase), if the foundation’s

person to vote for the election of directors.

excess. To avoid the tax, the disposition must

disqualified persons hold more than 2% of the

Treasury stock and stock that is authorized but

take place within 90 days from the date the

enterprise’s voting stock, the foundation will be

unissued is not voting stock for these

foundation knew, or had reason to know, of the

liable for tax if the foundation holds more than

purposes. See Regulations sections

event that caused it to have excess business

25% of the voting stock or if the foundation and

53.4943-3(b)(1)(ii) and 53.4943-3(b)(2)(ii).

holdings. That 90-day period will be extended

its disqualified persons together hold more

For a partnership (including a limited

to include the period during which federal or

than 50% of the voting stock.

partnership) or joint venture, the term “profits

state securities laws prevent the foundation

However, during the second phase, if a

interest” should be substituted for “voting

from disposing of those excess business

foundation’s disqualified persons purchase

stock.” For any unincorporated business

holdings. See Regulations section

voting stock in a business enterprise after July

enterprise that is not a partnership, joint

53.4943-2(a).

18, 1984, causing the combined holdings of the

venture, or sole proprietorship, the term

General rules on the permitted holdings of

disqualified persons to exceed 2% of the

“beneficial interest” should be substituted for

a private foundation in a business

enterprise’s voting stock, the foundation has 5

“voting stock.” See Regulations section

enterprise. No excess business holdings tax

years to reduce its holdings in the enterprise to

53.4943-3(c).

is imposed (a) if a private foundation and all

below its second phase limit before the

Nonvoting stock. Corporate equity interests

disqualified persons together hold no more

increase will be treated as held by the

that do not have voting power should be

than 20% of the voting stock of a business

foundation. See sections 4943(c)(4)(D) and

classified as nonvoting stock. Evidences of

enterprise or (b) on nonvoting stock, if all

4943(c)(6).

indebtedness (including convertible

disqualified persons together do not own more

The first-phase periods may be suspended

indebtedness), warrants, and other options or

than 20% of the voting stock of the business

pending the outcome of any judicial proceeding

rights to acquire stock should not be

enterprise.

the private foundation brings regarding reform

considered equity interests. See Regulations

If the private foundation and all disqualified

or other procedure to excuse it from

section 53.4943-3(b)(2).

persons together do not own more than 35% of

compliance with its governing instrument or

the enterprise’s voting stock, and effective

For a partnership (including a limited

similar instrument in effect on May 26, 1969.

control is in one or more persons who are not

partnership) or joint venture, the term “capital

See section 4943(c)(4)(C) and Regulations

disqualified persons in connection with the

interest” should be substituted for “nonvoting

section 53.4943-4.

foundation, then 35% may be substituted for

stock.” For any unincorporated business that is

Holdings acquired by trust or will. Holdings

20% wherever it appears in the preceding

not a partnership, joint venture, or sole

acquired under the terms of a trust that was

paragraph. See sections 4943(c)(2) and

proprietorship, references to nonvoting stock

irrevocable on May 26, 1969, or under the

4943(c)(3).

do not apply for computation of permitted

terms of a will executed by that date, are

holdings. See Regulations section

If a private foundation and all disqualified

treated as held by the foundation on May 26,

53.4943-3(c)(4).

persons together had holdings in a business

1969, except that the 15- and 10-year periods

enterprise of more than 20% of the voting stock

Attribution of business holdings. In

of the first phase for the holdings start on the

on May 26, 1969, substitute that percentage for

determining the holdings in a business

date of distribution under the trust or will

20% and for 35% (if the holding is greater than

enterprise of either a private foundation or a

instead of on May 26, 1969. See section

35%), using the principles of section 4943(c)(4)

disqualified person, any stock or other interest

4943(c)(5) and Regulations section 53.4943-5.

that apply. However, the percentage

owned directly or indirectly by or for a

See section 4943(d)(1) and Regulations

substituted may not be more than 50%.

corporation, partnership, estate, or trust is

section 53.4943-8 for rules relating to

considered owned proportionately by or for its

The percentage substituted under the

constructive holdings held in a corporation,

shareholders, partners, or beneficiaries. In

preceding paragraph is (a) subject to

partnership, estate, or trust for the benefit of

general, this rule does not apply to certain

the foundation.

reductions and limitations (see sections

income interests or remainder interests of a

4943(c)(4)(A)(ii) and 4943(c)(4)(D)) and (b)

Gifts or bequests of business holdings.

private foundation in a split-interest trust

applicable, both in connection with the voting

Except as provided in the exception regarding

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

stock and, separately, in connection with the

Holdings acquired by trust or will (discussed

Regulations section 53.4943-8.

value of all outstanding shares of all classes of

above), there is a special rule for private

stock (see section 4943(c)(4)(A)(iii)).

Taxable period. The taxable period begins on

foundations that have excess business

the first day the foundation has excess

Interests held by a private foundation on

holdings as a result of a change in holdings

business holdings and ends on the earliest of:

May 26, 1969. For private foundations that

after May 26,1969. This rule applies if the

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The mailing date of a notice of deficiency,

had business holdings on May 26, 1969 (or

change is other than by purchase by the

under section 6212, in connection with the

holdings acquired by trust or will as described

foundation or by disqualified persons (such as

initial tax on excess business holdings related

below), that were more than the current limits

through gift or bequest) and the additional

to those holdings,

permit, there are transitional rules that permit

holdings result in the foundation having excess

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The date the excess is eliminated, or

the foundation to dispose of the excess over

business holdings. In that case, the foundation

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Form 4720 Instructions

Instructions For Form 4720 - Return Of Certain Excise Taxes On Charities And Other Persons - Department Of The Treasury - 2005 Page 5

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