Fun Fact: Did you know that one of the largest food product distributors in the world is also owned by a 501(c)(3) tax exempt organization? The Newman’s Own Foundation (a private foundation) owns 100% of No Limit LLC, the producer and distributor of the Newman’s Own brand of food products (think the salad dressings).
But why is this important? Because this ownership relationship has created a little-known economic opportunity for all private foundations in the United States.
Here’s the background. In most cases, a private foundation, cannot own more than 20% of a for-profit business without being assessed onerous sanctions. This is called the excess business holdings rule.
As already stated, the Newman’s Own Foundation is the 100% owner of No Limit LLC. The LLC was a bequest to the Foundation by Paul Newman when he died in 2008. Normally Newman’s Own would have to divest 80% of No Limit within 10 years of the bequest under the excess business holdings rule. However, with some clever lobbying, the Foundation successfully secured a change in the law creating an economic opportunity that those in the philanthropic sector should know about.
The 2017 Bipartisan Budget Act carved out a small but very important exception to the usual rule (the Newman’s Own Exception). Under the below circumstances a private foundation can be 100% owner of a for-profit entity and take advantage of the exception.
- The foundation must be the only shareholder/owner of the for-profit;
- 100% of the for-profit’s net operating expenses must pass directly to the foundation within 120 days of the end of the fiscal quarter;
- The board of directors of the for-profit must be independent of the foundation;
- No substantial contributor of the foundation can be someone in control of the for-profit;
- The foundation must acquire the for-profit in a manner other than a purchase; and
- No loans may be outstanding to a disqualified person.
This exception does not apply to donor advised funds nor to non-functionally integrated type III supporting organizations.
The upshot is that a private foundation can now take advantage of the passive income exception to the Unrelated Business Income Tax (UBIT) with 100% dividends of a for-profit corporation or LLC (so long as the foundation is a passive member of a manager-managed LLC). Before, only a public charity could take advantage of this exception.
This is an important consideration that anyone wanting to leave a sizable bequest in the form of a business entity should have in mind. Legacies can now have even more opportunities to be preserved for high social impact.
As a side note, this is also a great example of how effective lobbying by a charitable organization can successfully create massive amounts of opportunities for others in the charitable sector. This serves as another reminder that charitable organizations should not be so quick to dismiss the role of lobbying in their operations.
If you have questions about this article or have any other tax-exempt or nonprofit law questions, feel free to reach out: firstname.lastname@example.org
The above article is for general information purposes only and should not be relied upon as specific legal advice. This article, or using the email@example.com form, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact Jacob Ferrari at firstname.lastname@example.org
 The Excess Business Holdings rule requires divesture occur within 5 years with an allowance for one 5-year extension.