Private foundations may now own philanthropic businesses whose profits are dedicated to charity without the prohibitive excess business holdings tax. Newman’s Own Foundation was the proponent of recent legislation that allows it to continue to own 100% of Newman’s Own, the food company founded by Paul Newman and bequeathed to the foundation upon his death. Newman’s Own has contributed all of its profits to charity since its founding in 1982.
Private foundations and their disqualified persons are generally permitted to hold up to 20% (or in certain cases up to 35%) of the voting stock of a corporation under the excess business holding rules. These rules have previously prevented a private foundation from owning a business even if all of its profits are dedicated to charity.
The Bipartisan Budget Act of 2018 contained the Philanthropic Enterprise Act, which amended the excess business holdings rules to allow Newman’s Own and similar private foundations to own businesses that meet certain conditions. The excess business holdings rules now have an exception for philanthropic businesses that satisfy the following conditions:
The exception does not apply to businesses that are owned by other types of entities also treated as private foundations for purposes of the excess business holdings rules, including donor advised funds, supporting organizations, nonexempt charitable trusts, and split-interest trusts.
The excess business holdings rules were originally designed almost 50 years ago to address a range of concerns about foundations controlling active businesses. These included concerns that foundation-owned businesses would be operated to benefit family members rather than the charity and that foundation managers would devote their attention to the operation of the business rather than attend to their charitable duties. Another concern was that “[a] remarkable number of foundation-owned enterprises proceed from year to year realizing substantial profits, but making negligible or no distributions to their parent organizations.”
The excess business holding rules were enacted in 1969 to address these concerns but did so with a broad brush that effectively prohibited private foundations from long-term ownership of substantial interests in most business enterprises. The amendment allows foundations to hold businesses in a structure that addresses each of these areas of concern, while allowing donors to commit the profits of their business to charity in perpetuity.
Socially-minded business owners who wish to devote the profits of their business to charity while making a charitable contribution of their business to a private foundation should consider the following planning points:
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
 HR Rep. No. 91-413, at 218, reprinted in 1969-3 CB 200, 218. See also S. Rep. No. 91-552, reprinted in 1969-3 CB 423.
 Senate Comm. on Finance, 89th Cong., Treasury Department Report on Private Foundations (Comm. Print 1965), p. 33.
 Section 512(e)(1).