Foundation receives five more years to sell excess business holdings

Plain-English summary

A private foundation received a 50 percent membership interest in a health care holding company from a disqualified person. The unusually large gift created excess business holdings, and the company had a complex structure involving regulated subsidiaries in several states. During the initial five-year disposal period, the foundation hired an adviser and negotiated with four potential buyers, but no sale was completed at an acceptable price. The foundation also submitted a revised disposal plan to the state attorney general. The IRS granted an additional five years to sell the interest and confirmed that the excess holdings would not be taxed under section 4943(a)(1) during that extension.

Ruling snapshot

• Question: Could the private foundation receive five more years to dispose of an unusually large, complex business interest?
• Outcome: Approved, with an additional five-year disposal period and no section 4943(a)(1) tax during that period
• Key authorities: IRC §§ 4943(a)(1), 4943(c)(1)-(3), 4943(c)(6), and 4943(c)(7)

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 202342002                                            Third Party Communication: None
Release Date: 10/20/2023                                     Date of Communication: Not Applicable
Index Number: 4943.03-01
                                                             Person To Contact:
-------------------------------------                        ----------------------, ID No.
                                                             Telephone Number:
                                                             --------------------
                                                             Refer Reply To:
                                                             CC:EEE:EOET:EO1
                                                             PLR-100883-23
                                                             Date:
                                                             July 03, 2023

LEGEND:

Taxpayer          = --------------------------------------
State             =
Donor             = --------------------------
Company           =

Date 1            = --------------------------
Date 2            =
Date 3            = -------------------------
Date 4            =
X                 = -----------------

Dear        :

This letter responds to a request from Taxpayer’s authorized representative dated
December 23, 2022, requesting additional time to dispose of excess business holdings
under section 4943(c)(7) of the Internal Revenue Code. 1 Taxpayer represents the facts as
follows.

FACTS

Taxpayer was incorporated as a State nonprofit corporation on Date 1. It is exempt from
federal income tax under section 501(a) as an organization described in section 501(c)(3)
and is classified as a private foundation under section 509(a). Company is a holding
company of subsidiaries that provide Medicare-certified hospice and home health care
services in six states. Company is treated as a partnership for federal tax purposes. It has
numerous subsidiaries that operate under various regulatory regimes. Donor is a
disqualified person under section 4946(a)(1)(A).


1
 All subsequent section references are to the Internal Revenue Code of 1986, as amended, unless
otherwise specified.
PLR-100883-23                                 2

Donor gave Taxpayer a 50 percent membership interest in Company on Date 2. Donor
simultaneously gave X a 25 percent membership interest in Company. Donor retained a
25 percent membership interest in Company after the Date 2 gifts to Taxpayer and X. The
membership interests given and retained constitute both a profits interest and a capital
interest in Company. Taxpayer states that its membership interest in Company is the
largest gift it has ever received, being larger than the combined value of all other gifts that
it has received. Like Donor, X and Company are disqualified persons under section
4946(a)(1).

Taxpayer recognized that Donor’s gift caused it to have excess business holdings in
Company under section 4943(c)(1). Thereafter, Taxpayer engaged a professional advisor
on Date 3, seeking advice and help selling its interest in Company. The advisor actively
marketed Company, and in the ensuing three years the advisor identified four possible
buyers, each of which executed a letter of intent to purchase Taxpayer’s interest in
Company. For various reasons, however, none of the subsequent negotiations resulted in
a sale. Taxpayer states that the potential buyers had concerns stemming from, among
other things, Company’s complex corporate structure, as well as an inability to agree on a
sale price that was not substantially below Company’s fair market value. Taxpayer also
states that the COVID-19 pandemic and related governmental restrictions had a negative
impact on Company’s industry, which made selling Taxpayer’s interest in Company more
difficult.

Taxpayer intends to continue working with the advisor to sell its interest in Company. In
addition, Taxpayer sought assistance from a law firm to help identify actions that might
facilitate a sale of its interest in Company. Taxpayer has implemented personnel and
governance changes at Company based on recommendations of the advisor and law firm
that it expects will enable a future sell. Taxpayer is optimistic that, with help from the
advisor and the law firm, it will sell its interest in Company during the extension it seeks,
particularly now that most of the hardships caused by the Covid-19 pandemic have
passed.

Taxpayer’s request under section 4943(c)(7) was submitted prior to Date 4, and Taxpayer
notified State’s attorney general as the statute requires.

RULING REQUESTS

       1. Taxpayer requests a ruling granting it an additional five-year period to dispose of
          its excess business holdings in Company under section 4943(c)(7).

       2. Taxpayer also seeks confirmation that its interest in Company will not be taxed
          under section 4943(a)(1) during the extension period.

LAW

Section 4943(a)(1) imposes a tax on the excess business holdings of a
private foundation.
PLR-100883-23                                  3

Section 4943(c)(1) provides that the term excess business holdings means the amount of
stock or other interest in a business enterprise that the foundation would have to dispose
of to a person other than a disqualified person for the foundation’s remaining holdings in
such enterprise to be permitted holdings.

Section 4943(c)(2)(A) provides that the permitted holdings of a private foundation in an
incorporated business enterprise are 20 percent of the voting stock, reduced by the
percentage of voting stock in the enterprise owned by all the foundation’s disqualified
persons. Permitted holdings include nonvoting stock held by the private foundation in any
case in which all disqualified persons together do not own more than 20 percent of the
voting stock of the incorporated business enterprise.

Section 4943(c)(3)(A) provides that, for purposes of section 4943(c)(2), “profits interest” is
substituted for “voting stock” and “capital interest” is substituted for “nonvoting stock” when
the enterprise is a partnership or joint venture.

Section 4943(c)(6) provides that if there is a change in a private foundation’s holdings in a
business enterprise (other than by purchase by the private foundation or by a disqualified
person) that causes the private foundation to have excess business holdings in such
enterprise, the interest of the foundation in such enterprise shall be treated as held by a
disqualified person during the five-year period beginning on the date of such change.

Section 4943(c)(7) provides that the Secretary may extend the section 4943(c)(6) period to
dispose of excess business holdings for an additional five years in the case of an
unusually large gift or bequest of diverse business holdings or holdings with complex
corporate structures if--

       (A) the foundation establishes that--
           (i) it made diligent efforts to dispose of such holdings during the initial five-year
                   period, and
           (ii) disposition within the initial five-year period has not been possible (except at
                   a price substantially below fair market value) by reason of the size and
                   complexity or diversity of such holdings,

       (B) before the close of the initial five-year period--
            (i)      the private foundation submits to the Secretary a plan for disposing of
                     all the excess business holdings involved in the extension, and
            (ii)     the private foundation submits the plan to the attorney general (or
                     other appropriate state official) having administrative or supervisory
                     authority or responsibility with respect to the foundation’s disposition
                     of the excess business holdings involved and submits to the Secretary
                     any response received by the private foundation during the five-year
                     period, and

       (C) the Secretary determines that such plan can reasonably be expected to be
       carried out before the close of the extension period.
PLR-100883-23                                  4

ANALYSIS

Donor and X are disqualified persons with respect to Taxpayer under section 4946(a)(1).
Donor gave Taxpayer a 50 percent membership interest in Company on Date 2. Taxpayer
represents that the membership interest constituted a 50 percent profits interest and a 50
percent capital interest in Company. The gift caused Taxpayer to have excess business
holdings under section 4943(c), because Taxpayer had no permitted holdings after the
reduction required by section 4943(c)(2)(A), as modified by section 4943(c)(3)(A).
Because Taxpayer acquired the excess business holdings by gift, Taxpayer had until Date
4 to dispose of those holdings by operation of section 4943(c)(6). Although it tried,
Taxpayer failed to sell its interest in Company by Date 4. Nevertheless, Taxpayer satisfies
the requirements under section 4943(c)(7) and warrants additional time to dispose of its
excess business holdings in Company.

As required under section 4943(c)(7), Taxpayer has established that the membership
interest in Company was an unusually large gift involving an entity with a complex
corporate structure. In addition, Taxpayer made diligent efforts to sell its interest in
Company during the five-year period that ended on Date 4, having sought assistance from
a professional advisor who facilitated negotiations with four potential buyers.

Taxpayer timely sought additional time to dispose of its holdings in Company, and it has
since embarked on a revised plan to achieve that result by collaborating with the advisor
and a law firm. Given the advisor’s past success attracting potential buyers and the
addition of legal counsel, it is reasonable to believe, considering the facts of this case, that
Taxpayer will prevail in its quest to sell its interest in Company during the period it seeks.
Taxpayer timely submitted its disposition plan to the State attorney general, as section
4943(c)(7) requires.

RULING

Based on the facts and representations submitted, we conclude that Taxpayer satisfies the
requirements under section 4943(c)(7) for an additional five years to dispose of its excess
business holdings in Company. We also confirm that Taxpayer’s excess business
holdings in Company will not be subject to tax under section 4943(a)(1) during the period
granted by this ruling.

The ruling contained in this letter is based on information and representations submitted on
behalf of Taxpayer and accompanied by penalty of perjury statements executed by an
individual with authority to bind Taxpayer and on the understanding that there will be no
material changes in the facts. While this office has not verified the material submitted in
support of the request for this ruling, it is subject to verification on examination. The
Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment
Taxes) will revoke or modify a letter ruling and apply the revocation retroactively if there
has been a misstatement or omission of controlling facts; the facts at the time of the
transaction are materially different from the controlling facts on which the ruling was based;
or, in the case of a transaction involving a continuing action or series of actions, the
PLR-100883-23                                           5

controlling facts change during the course of the transaction. See Rev. Proc. 2023-1,
2023-1 I.R.B. 1, section 11.05.

This letter does not address the applicability of any section of the Internal Revenue Code
or Treasury Regulations to the facts submitted, other than the sections specifically
described. Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, no opinion is expressed involving section 4941 or
any disqualified person with respect to Taxpayer. Furthermore, no opinion is expressed
regarding Taxpayer’s plan of disposition beyond the ruling provided herein.

The ruling in this letter is directed only to Taxpayer. Section 6110(k)(3) provides that it
may not be used or cited as precedent.

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

A copy of this letter must be attached to any income tax return to which it is relevant. If
Taxpayer files its returns electronically, it can satisfy this requirement by attaching a
statement to its return providing the date and control number of this letter.

Please address questions about this letter to the person identified as the person to contact
in the heading of this letter.

                                           Sincerely,




                                           Kenneth M. Griffin
                                           Chief
                                           Exempt Organizations Branch 3
                                           Employee Benefits, Exempt Organizations, and
                                           Employment Taxes

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