Trusts and Estates Blog

Paul Newman’s Legacy – Estate and Business Planning Finally Meet

By: William T. Coleman

Several years ago a client wanted to set up a private foundation and gift his 100% ownership in his corporation to a private foundation so that the profits generated were used for charitable purposes.  Unfortunately, Section 4943 of the Internal Revenue Code of 1986 (the “Code”) limited his ability to fulfill his philanthropy.  Generally, Section 4943 of the Code exacted a toll charge which made that planning impossible.  Section 4943 limited the combined holdings of a private foundation to 20% of the voting stock in a business enterprise.  The initial tax was 10% of the value of the excess holdings.  If ownership is continued by the foundation after the initial tax, an excise tax of 200% of the value of the excess business holdings was exacted.  Rather punitive to say the least!

Thanks to the efforts of the Paul Newman Foundation, the law has mercifully been changed.  Code Section 4943 was amended to permit now what my client wanted to accomplish.  Generally, the new excess business holdings tax does not apply if the following conditions are met:

  1. One hundred percent of the voting stock of the business enterprise is owned by the foundation;
  2. All off the foundation’s ownership interest in the business enterprise was acquired by means other than by purchase; and
  3. The net operating income of the business enterprise owned by the foundation is distributed to the foundation on a yearly basis; and
  4. The business enterprise operates independently by of the private foundation.

The definition of “independently” means:

  1. No substantial contributor to the foundation (or their family member) serves as a director, officer, trustee, manager, employee or contractor of the business enterprise;
  2. At least a majority of the foundation’s board of directors are not directors or officers of the business enterprise or family members or a substantial contributor to the foundation; and
  3. There is no loan outstanding from the business enterprise to a substantial contributor to the foundation or a family member of a substantial contributor.

This exception does not apply to donor advised funds and certain supporting organizations.

Paul Newman was a pioneer in this area and the foundation named after him deserves applause for adding common sense to the Code for business owners who have philanthropy in their hearts.  It is unfortunate that my client was unable to do this during his lifetime.

William T. Coleman is a partner with the law firm Brinkley Morgan in Fort Lauderdale, Florida.  His practice areas include: organizing and structuring business entities including corporations, limited liability companies, limited partnerships and partnerships including tax planning; negotiation and structuring of business transactions; structuring shareholder agreements, limited liability operating agreements and partnership agreements for maximum tax benefit; corporate and business reorganizations; negotiation of purchase and sale agreements for businesses; tax planning for businesses and entrepreneurs; preparation of contracts, distribution agreements and independent contractor agreements for both domestic and international business entities; structuring investments and businesses for inbound international clients; estate planning and preparation of wills, trusts, durable powers of attorney and health care surrogate forms; planning for generational transfer of family businesses; probate and guardianship; state and federal tax litigation; pension law including preparation of tax qualified pension and profit sharing plans; qualified domestic relations orders; tax planning for divorce; tax planning for gay and lesbian couples including state and business planning; formation and representation of not-for-profit entities and charities; income tax, estate tax and gift tax audits.  He may be reached at (954) 522-2200 or