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Exceptions to Tax on Excess Business

Excess Business Holdings. Excess business

voting interest in the enterprise (the 20-year

holdings is the amount of stock or other

first phase expired on May 25, 1989);

Holdings

interest in a business enterprise that the

b. A 15-year period beginning on May 26,

1. 2% De Minimis Rule. A private

foundation would have to dispose of to a

1969, if on that date the foundation and all

foundation will not be treated as having excess

person other than a disqualified person in order

disqualified persons together had more than a

business holdings in any enterprise in which it,

for the foundation’s remaining holdings in the

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

together with related foundations as described

enterprise to be permitted holdings (section

profits or beneficial interest of any

in the instructions for Form 990-PF (under the

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

unincorporated business), or more than a 75%

definition for “disqualified person” in the

interest in the value of all outstanding shares of

Sole Proprietorships. In general, a private

General Instructions) owns not more than 2%

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

foundation may not have any permitted

of the voting stock and not more than 2% in

interest of a partnership or joint venture) in the

holdings in a business enterprise that is a sole

value of all outstanding shares of all classes of

enterprise (the 15-year first phase expired on

proprietorship. For exceptions, see Pub. 578,

stock.

May 25, 1984); and

Chapter X. For a definition of sole

2. Disposition of Excess Business

c. A 10-year period beginning on May 26,

proprietorship, see Regulations section

Holdings Within 90 Days. Generally, when a

1969, in all other cases in which the foundation

53.4943-10(e).

private foundation acquires excess business

had excess business holdings on May 26,

holdings other than as a result of purchase by

Corporate Voting Stock. This stock entitles a

1969. The 10-year first phase expired on May

the foundation (such as an acquisition by a

person to vote for the election of directors.

25, 1979.

disqualified person), the foundation will not be

Treasury stock and stock that is authorized but

During the second phase (the 15-year

taxed on those excess holdings if it disposes of

unissued is not voting stock for these

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

enough of them so that it no longer has an

purposes. See Regulations sections

disqualified persons hold more than 2% of the

excess. To avoid the tax, the disposition must

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

enterprise’s voting stock, the foundation will be

take place within 90 days from the date the

liable for tax if the foundation holds more than

foundation knew, or had reason to know, of the

For a partnership (including a limited

25% of the voting stock or if the foundation and

event that caused it to have excess business

partnership) or joint venture, the term “profits

its disqualified persons together hold more

holdings. That 90-day period will be extended

interest” should be substituted for “voting

than 50% of the voting stock.

to include the period during which Federal or

stock.” For any unincorporated business

state securities laws prevent the foundation

However, during the second phase, if a

enterprise that is not a partnership, joint

from disposing of those excess business

foundation’s disqualified persons purchase

venture, or sole proprietorship, the term

holdings. See Regulations section

voting stock in a business enterprise after July

“beneficial interest” should be substituted for

53.4943-2(a).

18, 1984, causing the combined holdings of the

“voting stock.” See Regulations section

3. General Rules on the Permitted

disqualified persons to exceed 2% of the

53.4943-3(c).

Holdings of a Private Foundation in a

enterprise’s voting stock, the foundation has 5

Nonvoting Stock. Corporate equity interests

Business Enterprise. No excess business

years to reduce its holdings in the enterprise to

that do not have voting power should be

holdings tax is imposed (a) if a private

below its second phase limit before the

classified as nonvoting stock. Evidences of

foundation and all disqualified persons together

increase will be treated as held by the

indebtedness (including convertible

hold no more than 20% of the voting stock of a

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

indebtedness), warrants, and other options or

business enterprise or (b) on nonvoting stock,

4943(c)(6).

rights to acquire stock should not be

if all disqualified persons together do not own

The first-phase periods may be suspended

considered equity interests. See Regulations

more than 20% of the voting stock of the

pending the outcome of any judicial proceeding

section 53.4943-3(b)(2).

business enterprise.

the private foundation brings regarding reform

If the private foundation and all disqualified

or other procedure to excuse it from

For a partnership (including a limited

persons together do not own more than 35% of

compliance with its governing instrument or

partnership) or joint venture, the term “capital

the enterprise’s voting stock, and effective

similar instrument in effect on May 26, 1969.

interest” should be substituted for “nonvoting

control is in one or more persons who are not

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

stock.” For any unincorporated business that is

disqualified persons in connection with the

section 53.4943-4.

not a partnership, joint venture, or sole

foundation, then 35% may be substituted for

5. Holdings Acquired by Trust or Will.

proprietorship, references to nonvoting stock

20% wherever it appears in the preceding

do not apply for computation of permitted

Holdings acquired under the terms of a trust

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

holdings. See Regulations section

that was irrevocable on May 26, 1969, or under

4943(c)(3).

53.4943-3(c)(4).

the terms of a will executed by that date, are

If a private foundation and all disqualified

treated as held by the foundation on May 26,

Attribution of Business Holdings. In

persons together had holdings in a business

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

determining the holdings in a business

enterprise of more than 20% of the voting stock

of the first phase for the holdings start on the

enterprise of either a private foundation or a

on May 26, 1969, substitute that percentage for

date of distribution under the trust or will

disqualified person, any stock or other interest

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

instead of on May 26, 1969. See section

owned directly or indirectly by or for a

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

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

corporation, partnership, estate, or trust is

that apply. However, the percentage

See section 4943(d)(1) and Regulations

considered owned proportionately by or for its

substituted may not be more than 50%.

section 53.4943-8 for rules relating to

shareholders, partners, or beneficiaries. In

The percentage substituted under the

constructive holdings held in a corporation,

general, this rule does not apply to certain

preceding paragraph is (a) subject to

partnership, estate, or trust for the benefit of

income interests or remainder interests of a

reductions and limitations (see sections

the foundation.

private foundation in a split-interest trust

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

6. Gifts or Bequests of Business

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

applicable, both in connection with the voting

Holdings. Except as provided in exception 5,

Regulations section 53.4943-8.

stock and, separately, in connection with the

there is a special rule for private foundations

value of all outstanding shares of all classes of

that have excess business holdings as a result

Taxable Period. The taxable period begins on

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

of a change in holdings after May 26, 1969.

the first day the foundation has excess

4. Interests Held by a Private

This rule applies if the change is other than by

business holdings and ends on the earliest of:

Foundation on May 26, 1969. For private

purchase by the foundation or by disqualified

1. The mailing date of a notice of

foundations that had business holdings on May

persons (such as through gift or bequest) and

deficiency, under section 6212, in connection

26, 1969 (or holdings acquired by trust or will

the additional holdings result in the foundation

with the initial tax on excess business holdings

as described in exception 5 below), that were

having excess business holdings. In that case,

related to those holdings,

more than the current limits permit, there are

the foundation has 5 years to reduce these

2. The date the excess is eliminated, or

transitional rules that permit the foundation to

holdings or those of its disqualified persons to

3. The date the initial tax on excess

dispose of the excess over time without being

permissible levels to avoid the tax. See section

business holdings related to those holdings is

subject to the tax on excess business holdings.

4943(c)(6) and Regulations section 53.4943-6.

assessed.

During the first phase, no excess business

A private foundation that received an

holdings tax was imposed on a private

unusually large gift or bequest of business

When a notice of deficiency is not mailed

foundation for interests held since May 26,

because the restrictions on assessment and

holdings after 1969, and that has made a

1969, if the foundation had excess holdings on

diligent effort to dispose of excess business

collection are waived or because the deficiency

that date. The first phase is:

holdings, may apply for an additional 5-year

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

of paying the tax, respectively, will be treated

a. A 20-year period beginning on May 26,

period to reduce its holdings to permissible

levels if certain conditions are met. See section

as the end of the taxable period. See

1969, if on that date the foundation and all

4943(c)(7).

Regulations section 53.4943-9.

disqualified persons held more than a 95%

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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 - 2002 Page 5

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