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Private Foundations: Tax Law and Compliance, 4th Edition by Bruce Hopkins, Jody Blazek

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Chapter SevenExcess Business Holdings

  1. § 7.1 General Rules
    1. (a) Definition of Business Enterprise
    2. (b) Passive Income Businesses
    3. (c) Certain Investment Partnerships
    4. (d) Percentage Limitations
  2. § 7.2 Permitted and Excess Holdings
    1. (a) General Rules
    2. (b) Partnerships, Trusts, and Proprietorships
    3. (c) Constructive Ownership
    4. (d) Disposition Periods
  3. § 7.3 Functionally Related Businesses
  4. § 7.4 Rules Applicable to Certain Supporting Organizations
  5. § 7.5 Rules Applicable to Donor-Advised Funds
  6. § 7.6 Excise Taxes on Excess Holdings

§ 7.1 General Rules

A private foundation's ability to own a business—one that is not conducted as an exempt function—is limited by rules concerning excess business holdings. The basic rule is that the combined ownership, by a private foundation and those who are disqualified persons with respect to it,1 of a business enterprise in any form—corporation, partnership, joint venture, sole proprietorship, or other type of unincorporated company—may not exceed 20 percent. There are rules enabling foundations to, without penalty, receive and dispose of excess holdings when the excess is acquired by the foundation by means of a contribution or inheritance subject to limitations on purchasers imposed by the self-dealing rules.2

The rationale underlying these rules was summarized as follows:

Those who wished to use a foundation's stock holdings to acquire or retain business control in some cases were relatively unconcerned about producing income to be used by the foundation ...

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