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Excess business holdings. Excess business

holdings in any enterprise in which it, together

disqualified persons together had more than a

holdings is the amount of stock or other

with related foundations as described in the

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

interest in a business enterprise that the

instructions for Form 990-PF (under the

profits or beneficial interest of any

foundation would have to dispose of to a

definition for “disqualified person” in the

unincorporated business), or more than a 75%

person other than a disqualified person in order

General Instructions) owns not more than 2%

interest in the value of all outstanding shares of

for the foundation’s remaining holdings in the

of the voting stock and not more than 2% in

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

enterprise to be permitted holdings (section

value of all outstanding shares of all classes of

interest of a partnership or joint venture) in the

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

stock.

enterprise (the 15-year first phase expired on

May 25, 1984); and

Sole proprietorships. In general, a private

Disposition of excess business holdings

•

A 10-year period beginning on May 26,

foundation may not have any permitted

within 90 days. Generally, when a private

1969, in all other cases in which the foundation

holdings in a business enterprise that is a sole

foundation acquires excess business holdings

had excess business holdings on May 26,

proprietorship. For exceptions, see Pub. 578,

other than as a result of purchase by the

1969. The 10-year first phase expired on May

Chapter X. For a definition of sole

foundation (such as an acquisition by a

25, 1979.

proprietorship, see Regulations section

disqualified person), the foundation will not be

53.4943-10(e).

taxed on those excess holdings if it disposes of

During the second phase (the 15-year

enough of them so that it no longer has an

Corporate voting stock. This stock entitles a

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

excess. To avoid the tax, the disposition must

person to vote for the election of directors.

disqualified persons hold more than 2% of the

take place within 90 days from the date the

Treasury stock and stock that is authorized but

enterprise’s voting stock, the foundation will be

foundation knew, or had reason to know, of the

unissued is not voting stock for these

liable for tax if the foundation holds more than

event that caused it to have excess business

purposes. See Regulations sections

25% of the voting stock or if the foundation and

holdings. That 90-day period will be extended

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

its disqualified persons together hold more

to include the period during which federal or

For a partnership (including a limited

than 50% of the voting stock.

state securities laws prevent the foundation

partnership) or joint venture, the term “profits

from disposing of those excess business

However, during the second phase, if a

interest” should be substituted for “voting

holdings. See Regulations section

foundation’s disqualified persons purchase

stock.” For any unincorporated business

53.4943-2(a).

voting stock in a business enterprise after July

enterprise that is not a partnership, joint

18, 1984, causing the combined holdings of the

General rules on the permitted holdings of

venture, or sole proprietorship, the term

disqualified persons to exceed 2% of the

a private foundation in a business

“beneficial interest” should be substituted for

enterprise’s voting stock, the foundation has 5

enterprise. No excess business holdings tax

“voting stock.” See Regulations section

years to reduce its holdings in the enterprise to

is imposed (a) if a private foundation and all

53.4943-3(c).

below its second phase limit before the

disqualified persons together hold no more

Nonvoting stock. Corporate equity interests

increase will be treated as held by the

than 20% of the voting stock of a business

that do not have voting power should be

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

enterprise or (b) on nonvoting stock, if all

classified as nonvoting stock. Evidences of

4943(c)(6).

disqualified persons together do not own more

indebtedness (including convertible

than 20% of the voting stock of the business

indebtedness), warrants, and other options or

The first-phase periods may be suspended

enterprise.

rights to acquire stock should not be

pending the outcome of any judicial proceeding

If the private foundation and all disqualified

considered equity interests. See Regulations

the private foundation brings regarding reform

persons together do not own more than 35% of

section 53.4943-3(b)(2).

or other procedure to excuse it from

the enterprise’s voting stock, and effective

compliance with its governing instrument or

For a partnership (including a limited

control is in one or more persons who are not

similar instrument in effect on May 26, 1969.

partnership) or joint venture, the term “capital

disqualified persons in connection with the

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

interest” should be substituted for “nonvoting

foundation, then 35% may be substituted for

section 53.4943-4.

stock.” For any unincorporated business that is

20% wherever it appears in the preceding

not a partnership, joint venture, or sole

Holdings acquired by trust or will. Holdings

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

proprietorship, references to nonvoting stock

acquired under the terms of a trust that was

4943(c)(3).

do not apply for computation of permitted

irrevocable on May 26, 1969, or under the

If a private foundation and all disqualified

holdings. See Regulations section

terms of a will executed by that date, are

persons together had holdings in a business

53.4943-3(c)(4).

treated as held by the foundation on May 26,

enterprise of more than 20% of the voting stock

Attribution of business holdings. In

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

on May 26, 1969, substitute that percentage for

determining the holdings in a business

of the first phase for the holdings start on the

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

enterprise of either a private foundation or a

date of distribution under the trust or will

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

disqualified person, any stock or other interest

instead of on May 26, 1969. See section

that apply. However, the percentage

owned directly or indirectly by or for a

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

substituted may not be more than 50%.

corporation, partnership, estate, or trust is

See section 4943(d)(1) and Regulations

The percentage substituted under the

considered owned proportionately by or for its

section 53.4943-8 for rules relating to

preceding paragraph is (a) subject to

shareholders, partners, or beneficiaries. In

constructive holdings held in a corporation,

reductions and limitations (see sections

general, this rule does not apply to certain

partnership, estate, or trust for the benefit of

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

income interests or remainder interests of a

the foundation.

applicable, both in connection with the voting

private foundation in a split-interest trust

stock and, separately, in connection with the

Gifts or bequests of business holdings.

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

value of all outstanding shares of all classes of

Except as provided in the exception regarding

Regulations section 53.4943-8.

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

Holdings acquired by trust or will (discussed

Taxable period. The taxable period begins on

above), there is a special rule for private

Interests held by a private foundation on

the first day the foundation has excess

foundations that have excess business

May 26, 1969. For private foundations that

business holdings and ends on the earliest of:

•

holdings as a result of a change in holdings

had business holdings on May 26, 1969 (or

The mailing date of a notice of deficiency,

after May 26,1969. This rule applies if the

holdings acquired by trust or will as described

under section 6212, in connection with the

change is other than by purchase by the

below), that were more than the current limits

initial tax on excess business holdings related

foundation or by disqualified persons (such as

permit, there are transitional rules that permit

to those holdings,

•

through gift or bequest) and the additional

the foundation to dispose of the excess over

The date the excess is eliminated, or

•

holdings result in the foundation having excess

time without being subject to the tax on excess

The date the initial tax on excess business

business holdings. In that case, the foundation

business holdings.

holdings related to those holdings is assessed.

has 5 years to reduce these holdings or those

During the first phase, no excess business

When a notice of deficiency is not mailed

of its disqualified persons to permissible levels

holdings tax was imposed on a private

because the restrictions on assessment and

to avoid the tax. See section 4943(c)(6) and

foundation for interests held since May 26,

collection are waived or because the deficiency

Regulations section 53.4943-6.

1969, if the foundation had excess holdings on

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

that date. The first phase is:

of paying the tax, respectively, will be treated

A private foundation that received an

•

as the end of the taxable period. See

A 20-year period beginning on May 26,

unusually large gift or bequest of business

Regulations section 53.4943-9.

1969, if on that date the foundation and all

holdings after 1969, and that has made a

disqualified persons held more than a 95%

diligent effort to dispose of excess business

Exceptions to Tax on Excess Business

voting interest in the enterprise (the 20-year

holdings, may apply for an additional 5-year

Holdings

first phase expired on May 25, 1989);

period to reduce its holdings to permissible

•

2% De minimis rule. A private foundation will

A 15-year period beginning on May 26,

levels if certain conditions are met. See section

not be treated as having excess business

1969, if on that date the foundation and all

4943(c)(7).

-5-

Form 4720 Instructions

Instructions For Form 4720 - Return Of Certain Excise Taxes On Charities And Other Persons - Department Of The Treasury - 2004 Page 5

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