CHAPTER SEVEN
Excess Business Holdings
§ 7.1 GENERAL RULES
(b) Passive Income Businesses
p. 337. Insert as fourth paragraph:
A contemporary application of these rules involves the concept of the blocker corporation. In the most recent of its private rulings on the point, the IRS considered the tax law consequences of a wholly owned blocker corporation in a foreign country, formed by a private foundation for asset management and liability protection purposes. At least 95 percent of this corporation's income will be from passive investments; some investments will be debt-financed. This income will be foreign personal holding company income;19.1 no income will be attributable to insurance activity. The IRS ruled that (1) the Subpart F income19.2 to be received by the foundation from the corporation will not be subject to the unrelated business income tax;19.3 (2) the income the foundation will receive from the corporation will be dividend income and therefore excluded from unrelated business income taxation;19.4 (3) the foundation's ownership of the corporation's stock is not an excess business holding because the operation is not a business enterprise; and (4) the foundation's ownership of the corporation will not be a jeopardizing investment.19.5
p. 337, last paragraph. Insert as last sentence:
Income that is not passive will likely be unrelated business income, even though the underlying activity does not amount to a business enterprise.21.1
§ 7.2 PERMITTED AND EXCESS HOLDINGS
p. 342. Insert new sentence at end of introduction:
Note that permitted holdings for the 20 percent limits are expressed in the number of shares of voting stock without reference to the value of the shares. However, the two percent de minimis amount is either 2 percent of the voting shares or 2 percent of the value of all outstanding shares of all classes of stock. Neither the code nor the regulations contain specific rules for valuation.
(a) General Rules
p. 342, note 61. Insert following existing text:
A private foundation was able to correct an excess business holding of stock by granting stock to public charities to bring its ownership of the shares to less than the 2 percent de minimis amount (see text accompanied by supra note 51); the IRS ruled that the additional criteria accompanying a grant to one of these charities will not entail any material restrictions (Priv. Ltr. Rul. 201414031).
§ 7.3 FUNCTIONALLY RELATED BUSINESSES
*p. 349. Insert as first two complete paragraphs:
Likewise, a private foundation owned a portion of a limited liability company, which was a multi-member LLC, with two other members. The LLC operated a low-income housing project for the elderly, which qualified for and had been allocated low-income housing tax credits. The private foundation proposed to purchase the other two members' interests at less than fair market value, thereby becoming the sole owner of the LLC. The private foundation represented that the project operated by the LLC, which would be attributed to the foundation, would meet the IRS's low-income housing safe harbor standards, pursuant to which a low-income housing project will be considered to further charitable purposes by relieving the poor and distressed. The IRS analyzed whether the foundation's ownership of the LLC should be treated as an excess business holding. Because the activity of the LLC was substantially related to the foundation's exempt purpose, the IRS determined that the LLC's operation of the housing project was a functionally related business and therefore not a business enterprise.115.1
*In some instances, more than one definition of a functionally related business115.2 is used in the same context. For example, a private operating foundation was in the process of funding and operating a community cultural center, which will include a museum, archive, library, and atrium. This complex will include a gift shop and a coffee shop for use by the center's visitors and employees. The gift shop will sell items affiliated with the center's exhibits, artifacts, and performances. The coffee shop is intended to be a “convenient eating place” for the center's visitors and employees, rather than a “public eating establishment.” The IRS ruled that operation of the coffee shop will be a related business because it will help attract visitors to the center and enable them to spend more time utilizing the center's facilities by not having to seek food and drink elsewhere.115.3 Without explanation, the IRS did not rule on whether the gift shop or any items to be sold in that shop would result in unrelated business income. Nonetheless, the agency held that the gift shop as proposed “is an activity carried on as part of the overall activities as they relate to the [c]enter's exempt educational purpose” and that as long as it is “actually operating as a functional part of the [c]enter's larger aggregate of other activities which are related to the [c]enter's exempt educational purpose,” the gift shop will be a functionally related business.
*§ 7.4 RULES APPLICABLE TO CERTAIN SUPPORTING ORGANIZATIONS
p. 350, note 124. Insert following existing text:
The IRS exercised that authority, holding that a Type III non-functionally integrated supporting organization's holdings in a development project are exempt from the excess business holdings tax, on the basis of a compelling set of facts and factors set forth in the Joint Committee on Taxation's Technical Explanation of the Pension Protection Act of 2006 that the IRS is to consider in exercising this authority (Priv. Ltr. Rul. 201645011).
§ 7.6 EXCISE TAXES ON EXCESS HOLDINGS
p. 351, note 133. Delete second sentence and substitute:
In two other instances, however, the IRS abated the tax, where the private foundations involved relied, in good faith, on incorrect legal advice (Tech. Adv. Mems. 200347023, 201448032). Yet, when a private foundation relied on legal advice that was not specifically prepared for it, the IRS refused to abate the tax, taking the position that the foundation failed to demonstrate the requisite reasonable cause (Tech. Adv. Mem. 201441021).