United States: Be The Next Paul Newman - Give 100% Of Your Business To Your Private Foundation, Newman's Own Style

The "Bipartisan Budget Act of 2018" added the "Newman's Own" exception to the private foundation excess business holdings rule, allowing business owners to make a charitable contribution of 100% of a business to their private foundation, and keep it there in one piece.  The business must then give all of its profits "upstream" to the private foundation, and meet certain other requirements.  The new law creates a significant planning opportunity for business owners seeking to convert their company into a social enterprise 100% owned and controlled by their private foundation.

Notwithstanding the 100% private foundation ownership, equity-based incentive compensation can still be utilized by the business, including through the use of phantom stock options.  Non-voting stock or options can also be utilized, which could prove highly valuable in the case of a sale of the business by the foundation or an initial public offering (IPO) of 80% or more of the foundation's stock in the business enterprise.  In other words, the business can continue to operate and provide incentive compensation as a for-profit company – a wholly-owned taxable subsidiary that dividends its profits to its parent private foundation.

Also, notwithstanding the independent ownership rules, it appears that the business owner making the contribution can retain ultimate control of the private foundation by retaining the right to appoint and remove a majority or more of the private foundation's board of directors.

In the absence of this exception to the excess business holdings rules, the Newman's Own Foundation would have been forced to sell most of its now nearly ten years old 100% ownership interest in the ubiquitous "Newman's Own" salad dressing and pasta sauce company.

Note that the parameters of the Newman's Own exception do not need to be met during the 5 or 10 year period during which excess business holdings acquired other than by purchase, such as by gift or bequest, are not yet subject to tax.

Parameters of the "Newman's Own" Exception

The tax on excess business holdings no longer applies to a private foundation's holdings in any business enterprise that meets certain ownership rules, distributes all profits to the parent private foundation, and operates independently of the foundation. 

100% Voting Stock Ownership

The ownership requirements are satisfied if:

  1. 100% of the voting stock in the business enterprise is held by the private foundation at all times during the taxable year; and
  2. 100% of the private foundation's ownership interests in the business enterprise were acquired other than by purchase (i.e., by gift or bequest).

"All Profits to Charity"

No later than 120 days after the close of the taxable year, the business enterprise must distribute an amount equal to its "net operating income" for such taxable year to the private foundation. 

For this purpose, "net operating income" is the gross income of the business enterprise for the taxable year, reduced by:

  1. the deductions for the taxable year directly connected with the production of the income,
  2. the federal income tax imposed on the business enterprise for the taxable year, and
  3. an amount for a reasonable reserve for working capital and other business needs of the business enterprise.

The foundation's receipt of these required dividend distributions is exempt from federal income tax, but the income will be subject to the 2% (or 1%, in certain cases) private foundation excise tax on net investment income.

Independent Operation

The following three independent operation requirements must be met at all times during the taxable year:

  1. No substantial contributor to the private foundation, or family member of such a contributor, is a director, officer, trustee, manager, employee, or contractor of the business enterprise (or an individual having powers or responsibilities similar to any of the foregoing). 

    In other words, the private foundation's contributing family cannot be on the business enterprise side in any capacity.

  2. At least a majority of the board of directors of the private foundation are not also (i) directors or officers of the business enterprise or (ii) family members of a substantial contributor to the private foundation.

    So, a minority of the private foundation board can be made up of family members of a substantial contributor, and a minority of the foundation's board (the non-substantial contributor/family directors) can also serve as directors and officers of the business enterprise. 

    While the law is silent as to control of the private foundation itself, presumably the foundation, as a nonprofit corporation, could have substantial contributors or their family members serve as statutory members of the private foundation.  Those statutory members could have the right to appoint and remove all of the foundation's directors, such that the contributing family maintains ultimate control although constituting only a minority of the foundation's board.  Alternatively, the substantial contributor and/or his or her family could hold designation rights with respect to the foundation's board of directors.  Of course, regardless of the source of their election, appointment or designation to the board, the directors owe their fiduciary duties to the private foundation and its charitable purposes.

  3. There is no loan outstanding from the business enterprise to a substantial contributor to the private foundation or a family member of such a contributor.

Note that the Newman's Own exception does not apply to donor advised funds and certain supporting organizations that are subject to the excess business holdings rules, charitable trusts, or split-interest trusts.

Excess Business Holdings (Generally)

The excess business holdings rules applicable to private foundations and certain deemed private foundations (e.g., donor advised funds and certain supporting organizations) are designed to limit an individual's ability to retain control of a business enterprise by establishing a private foundation and transferring substantial ownership of the business to such private foundation.

Section 4943 of the Internal Revenue Code limits the percentage interest that a private foundation and its disqualified persons can together own in a business enterprise to 20%, though the limit is increased to 35% if the foundation can demonstrate that an unrelated person or persons have effective control over the business enterprise.  A foundation generally has a 5-year period to dispose of excess business holdings acquired other than by purchase, such as by gift or bequest, without being subject to tax on such excess business holdings.  This 5-year period may be extended an additional 5 years in limited circumstances, such as an unusually large gift or bequest of diverse business holdings or holdings with complex corporate structures.

The initial tax is equal to 5% of the value of the excess business holdings held during the foundation's applicable taxable year.  After the initial tax has been imposed, an excise tax of 200% of the excess holdings is imposed on the foundation if it has not disposed of the remaining excess business holdings by the end of the applicable taxable period.  This 200% confiscatory tax ensures that private foundations seek to immediately dispose of any excess business holdings.


The new exception appears best suited to situations where an individual is seeking to transfer ownership of a wholly-owned business to a private foundation by gift or bequest, and for the business to pay dividends of all of its profits to the foundation. 

Notwithstanding the independent operation requirements, the contributor and his or her family can still maintain ultimate control of the private foundation (through statutory membership interests or director designation rights) while the private foundation retains 100% of the voting interest in the business enterprise.

Also, as a for-profit, the business enterprise can utilize "phantom" stock or similar equity-based incentive compensation plans for senior executives and other key employees as an alternative to stock options or an employee stock ownership plan (ESOP).  Non-voting stock or options can also be utilized and eventually monetized upon a sale of the business by the foundation or an initial public offering (IPO) of 80% or more of the foundation's stock in the business enterprise.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions