Foreign Foundation Ruled to Not Have Excess Business Holdings

• Date: 01 November 2017
• Published date: 01 November 2017
• DOI: http://doi.org/10.1002/npc.30389

Bruce R. Hopkins’ NONPROFIT COUNSEL

3

November 2017

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

private foundation, moreover, may not rely on written advice

if it knows, or has reason to know, that relevant facts were

not disclosed to the tax practitioner or that the written advice

is based on a representation or assumption that the founda-

tion knows, or has reason to know, is unlikely to be true.

Guidelines for Written Advice

Written advice that meets these guidelines—pre-

ferred written advice—ordinarily will be considered to

contain sufficient facts concerning the foreign grantee’s

operations and support to enable the IRS to determine

that the grantee would likely qualify as a qualifying pub-

lic charity as of the date of the written advice.

Preferred written advice and any attachments must

be written in or translated into English. It sets forth the

qualified tax practitioner’s own application of the law

to the facts and own conclusion that the grantee is a

qualifying public charity.

Preferred written advice (1) includes an attachment of

the grantee’s articles of organization, bylaws, or other orga-

nizing or enabling documents; (2) identifies the country in

which the grantee is formed; (3) identifies the tax-exempt

charitable purpose or purposes of the grantee; (4) confirms

that the grantee is not expressly permitted to engage in

activities for noncharitable purposes, other than insubstan-

tially; (5) includes the requisite termination or dissolution

requirements; (6) confirms the absence of private inure-

ment arrangements; (7) confirms that the grantee does not

attempt to influence legislation, other than incidentally; (8)

confirms that the grantee does not engage in political cam-

paign activity; (9) discusses any affiliated organizations; (10)

describes the past, current, and anticipated activities of the

grantee, including details such as the manner of carrying

out the activities, sources of receipts, and types of expen-

ditures; and (11) includes verification that the grantee has

not been designated or identified as a terrorist organization

by the US government.

If the grantee operates a hospital facility in a foreign

jurisdiction, the written advice need not address the

additional tax law requirements for US hospitals (IRC

§ 501(r)). If the grantee is a school, it must provide

evidence of racial nondiscrimination regarding students.

Sufficiency of Facts

The status of qualifying public charities may depend

on compliance with a financial test. If so, preferred writ-

ten advice includes an attached financial schedule with

sufficient information to demonstrate that the grantee

satisfies the applicable test. The requisite information for

grantees in existence less than five years and for more

than five years is summarized.

Also provided are rules concerning preferred written

advice for grantees that are the equivalent of US medical

research organizations, nonfunctionally integrated Type

III supporting organizations, private operating founda-

tions, and exempt operating foundations. [12.4(b)] ◆

FOREIGN FOUNDATION

RULED TO NOT HAVE EXCESS

BUSINESS HOLDINGS

The IRS ruled that a foreign private foundation will not

have an excess business holding in a company because the

company is not a business enterprise and will constructively

own only 20 percent of the voting stock of another com-

pany that is a business enterprise (Priv. Ltr. Rul. 201737003).

Facts

A foreign private foundation (Foundation) is recog-

nized by the IRS as a tax-exempt charitable organiza-

tion. The Foundation has received substantially all of its

financial support, other than investment income, from

sources outside the United States.

The Foundation proposes to make an investment in a

foreign organization that expects to be treated as a cor-

poration for US tax purposes (Company). The Company

is not a disqualified person with respect to the Founda-

tion. The Company will indirectly hold an undisclosed

percentage, and as much as 100 percent, of the voting

stock in a foreign business entity that also expects to be

regarded as a corporation for US tax purposes (Business).

The Business is a business enterprise for purposes of the

excess business holdings rules.

The Company, and the intermediate holding compa-

nies and partnerships through which the Company owns

its interest in the Business, are each expected to derive

an undisclosed percentage of their income from passive

sources. It is represented that the Company and the

intermediate entities are not business enterprises. The

Foundation, as the holder of all of one of three classes

of stock, which is 100 percent of the nonvoting stock,

in the Company has the right to elect an undisclosed

number of directors of the Company.

An undisclosed percentage of the voting stock of the

Company, all of another class, is held by a foreign trust

(Trust). The Trust is unrelated to and is not a disqualified

person with respect to the Trust. The Foundation holds

a call option over the voting shares held by the Trust,

enabling the Foundation to purchase the Trust’s voting

stock in the Company. This option has not been exercised.

No disqualified person with respect to the Founda-

tion holds any interest in the Company or the Business.

The Foundation does not hold any interest in the Busi-

ness other than by means of its interest in the Company.

Law

The Foundation, as a foreign private foundation (IRC

§ 4948(b)), is not subject to the excess business holdings

taxes. Nonetheless, the Foundation must comply with the

excess business holdings rules to avoid engaging in a pro-

hibited transaction (IRC § 4948(c)(2); Reg. 53.4948-1(c)(2)).