A uniform stock redemption avoided private-foundation self-dealing

Plain-English summary

A private foundation owned nonvoting shares in a closely held company that was a disqualified person, along with shares in a related domestic international sales corporation. The two corporations proposed linked stock redemptions, and the foundation wanted liquidity for charitable work. The company would offer the same terms to every holder of its nonvoting shares, pay cash equal to independently appraised fair market value, and apply any overall dollar cap proportionately without preferential treatment. Section 4941(d)(2)(F) excepts a corporate redemption from self-dealing when all securities of the foundation's class receive uniform terms and the foundation receives at least fair market value. The IRS ruled that the company's proposed redemption met that exception and would not be self-dealing.

Ruling snapshot

• Question: Would the company's proposed redemption of the foundation's nonvoting stock constitute self-dealing?
• Outcome: Approved, the redemption would not be self-dealing
• Key authorities: IRC §§ 4941(d)(2)(F) and 4946(a); Treas. Reg. § 53.4941(d)-3(d)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201624013                                             Third Party Communication: None
Release Date: 6/10/2016                                       Date of Communication: Not Applicable
Index Number: 4941.04-00
                                                              Person To Contact:
--------------------------------------------------            -----------------------, ID No. -------------------
----------------------------------------------                ---------------------------------------------------
-----------------------------------                           Telephone Number:
-----------------------                                       --------------------
                                                              Refer Reply To:
                                                              CC:TEGE:EOEG:EO1
                                                              PLR-136346-15
                                                              Date:
                                                              March 03, 2016


Legend:

Foundation       =    --------------------------------------------------
Company          =    ----------------------------------------------
DISC             =    ---------------------------------------
X                =    ------------
Y                =    ----------------


Dear ------------:

This letter responds to Company’s October 29, 2015, request for a ruling that a
corporate redemption will not be self-dealing under Internal Revenue Code
section 4941.

Facts

Company is a closely-held corporation owned by members of the X family and various
related entities. Foundation is a private foundation under sections 501(c)(3) and 509(a),
and it is a shareholder of Company. Foundation was funded by certain X family
members who are current or former shareholders of Company, and it is managed by
certain X family members who are current shareholders of Company.

DISC is a domestic international sales corporation formed to export products. The
shareholders of DISC are identical to the shareholders of Company, except Company is
also a shareholder of DISC. The shareholders of DISC entered into a shareholder
agreement, which requires any transfer of Company stock to be accompanied by a
transfer of an equal amount of DISC stock.

Company represents that Company and DISC are disqualified persons with respect to
Foundation.
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Company has one class of voting common stock and one class of nonvoting common
stock. DISC has only one class of voting common stock. Foundation owns nonvoting
common stock in Company and voting common stock in DISC.

The board of directors for Company and the board of directors for DISC have each
authorized, contingent on obtaining a favorable letter ruling, a redemption regarding
certain stock from any shareholder. The proposed redemptions involve Company’s
nonvoting common stock and DISC’s voting common stock. Any shareholder that
participates in the redemption with Company must also participate in the redemption
with DISC, in accordance with the DISC shareholder agreement. Foundation intends to
participate in the proposed redemptions for various reasons, including liquidity to
facilitate its charitable endeavors.

Company represents that the redemption price in both proposed redemptions will be
equal to the fair market value of the stock on the redemption date, payable in cash. The
fair market value of the stock on the redemption date will be determined by an
independent appraiser who is not a disqualified person with respect to Foundation, and
who is competent to conduct the appraisal. The appraiser will not derive a benefit,
economic or otherwise, from the value assigned to the stock.

The proposed Company redemption will be subject to a maximum aggregate
redemption price of $Y. If multiple shareholders participate in the redemption and if the
total fair market value of the stock offered for redemption by the shareholders on the
redemption date exceeds $Y, the number of shares redeemed from each participating
shareholder will equal the number of shares offered by the shareholder multiplied by a
fraction containing a numerator equal to the maximum number of shares to be
redeemed, and a denominator equal to the total number of shares offered by all
participating shareholders, such that the total redemption price will not exceed $Y.

No shareholder will receive any preferential treatment compared to any other
shareholder regarding any aspect of either proposed redemption.

Ruling Requested

Company requests a ruling that its proposed redemption of nonvoting common stock
will not constitute an act of self-dealing under section 4941.

Law

Section 4941 imposes an excise tax on each act of self-dealing between a
disqualified person and a private foundation, paid by the disqualified person that
participates in the act of self-dealing.

Section 4941(d)(1) defines an act of self-dealing as including a sale or exchange of
property between a private foundation and a disqualified person.
PLR-136346-15                               3

Section 4941(d)(2)(F) provides that a transaction between a private foundation and a
corporation which is a disqualified person (as defined in section 4946(a)), pursuant to
a redemption shall not be an act of self-dealing if all of the securities of the same
class as that held by the foundation are subject to the same terms and such terms
provide for receipt by the foundation of no less than fair market value.

Section 4946(a) defines the term “disqualified person” as including, among other
things, a substantial contributor to the foundation and corporations where certain
disqualified persons own more than 35 percent of the total combined voting power of
such corporation.

Section 53.4941(d)-3(d)(1) of the Foundation and Similar Excise Taxes Regulations
provides that under section 4941(d)(2)(F), any transaction between a private
foundation and a corporation that is a disqualified person will not be an act of self-
dealing if such transaction is engaged in pursuant to a redemption, so long as all the
securities of the same class as that held (prior to the transaction) by the foundation
are subject to the same terms and such terms provide for receipt by the foundation of
no less than fair market value. The regulation further provides that the securities will
not be subject to the same terms unless, pursuant to such transaction, the
corporation makes a bona fide offer on a uniform basis to the foundation and every
other person who holds such securities. The regulation explains that it will be
evidence that such offer was not made on a uniform basis if a private foundation
receives property, such as debentures, while all other persons holding securities of
the same class receive cash for their interests.

Section 53.4941(d)-3(d)(2) of the Foundation and Similar Excise Taxes Regulations
illustrates the redemption exception in section 4941(d)(2)(F) with two examples, not
repeated here.

Analysis

Under the proposed redemption by Company, all nonvoting common stock is subject to
the same terms, and such terms provide for receipt by Foundation as a shareholder of
no less than fair market value. Company will make a bona fide offer on a uniform basis
to all shareholders of nonvoting common stock, including Foundation. All shareholders
participating in the redemption will receive cash for their interests. The fact that the
redemption offer is limited to a fixed dollar amount, and the fact that the redemption
offer by Company is in tandem with an equivalent offer by DISC, does not detract from
the uniform nature of the offer by Company under the facts presented.

Ruling

Based solely on the facts and representations submitted by Company, we rule that the
proposed redemption of shares of nonvoting common stock of Company will not
constitute an act of self-dealing under section 4941.
PLR-136346-15                                  4

The rulings contained in this letter are based upon information and representations
submitted by or on behalf of Company (accompanied by a penalty of perjury statement
executed by an individual with authority to bind Company) and upon the understanding
that there will be no material changes in the facts.

This office has not verified any of the material submitted in support of the request for
rulings, and such material is subject to verification on examination.

This ruling does not address the applicability of any section of the Code or Regulations
to the facts submitted other than with respect to the sections specifically described,
and, except as expressly provided in this letter, no opinion is expressed or implied
concerning the federal income tax consequences of any aspects of any transaction or
item of income set forth above.

Because it could help resolve questions concerning federal income tax status, this ruling
should be kept in Company’s permanent records.

Company must attach a copy of this letter to any tax return to which it is relevant.
Alternatively, if Company files its return electronically, this requirement may be satisfied
by attaching a statement to the return that provides the date and control number of this
letter.

This ruling will be made available for public inspection under section 6110 after certain
deletions of identifying information are made. For details, see the enclosed Notice 437,
Notice of Intention to Disclose. A copy of this ruling, showing the deletions that we
intend to make on the version that will be made available to the public, is attached to the
Notice 437. If Company disagrees with our proposed deletions, it should follow the
instructions in the Notice 437.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to each of Company’s authorized representatives.

This letter is directed only to Company. Section 6110(k)(3) provides that it may not be
used or cited as precedent by anyone else, including Foundation, DISC, and any
disqualified person other than Company.
.
PLR-136346-15                              5

If you have any questions about this ruling, please contact the person whose name
and telephone number are shown in the heading of this letter.

                                    Sincerely,



                                    Kenneth M. Griffin
                                    Chief
                                    Exempt Organizations Branch 3
                                    (Tax Exempt & Government Entities)

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