[Senate Report 114-20]
[From the U.S. Government Publishing Office]
Calendar No. 43
114th Congress } { Report
SENATE
1st Session } { 114-20
===================================================================.
PHILANTHROPIC ENTERPRISE ACT OF 2015
_______
April 14, 2015.--Ordered to be printed
_______
Mr. Hatch, from the Committee on Finance,
submitted the following
R E P O R T
[To accompany S. 909]
The Committee on Finance, having considered an original
bill, S. 909, to amend the Internal Revenue Code of 1986 to
exempt private foundations from the tax on excess business
holdings in the case of certain philanthropic enterprises which
are independently supervised, and for other purposes, having
considered the same, reports favorably thereon without
amendment and recommends that the bill do pass.
CONTENTS
Page
I. LEGISLATIVE BACKGROUND............................................1
II. EXPLANATION OF THE BILL...........................................2
A. Provide an Exception to the Private Foundation Excess
Business Holdings Rules for Certain Philanthropic
Business Holdings (sec. 2 of the bill and sec. 4943
of the Code)......................................... 2
III.BUDGET EFFECTS OF THE BILL........................................5
IV. VOTES OF THE COMMITTEE............................................6
V. REGULATORY IMPACT AND OTHER MATTERS...............................6
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED.............7
I. LEGISLATIVE BACKGROUND
The Committee on Finance, having considered S. 909, the
``Philanthropic Enterprise Act of 2015,'' to amend the Internal
Revenue Code of 1986 to exempt private foundations from the tax
on excess business holdings in the case of certain
philanthropic enterprises which are independently supervised,
and for other purposes, reports favorably thereon without
amendment and recommends that the bill do pass.
Background and need for legislative action
Background.--Based on a proposal recommended by Senators
Thune and Menendez, and on section 2 of S. 2710 (113th Cong.,
2d Sess.), co-sponsored by Senators Thune and Menendez, the
Committee on Finance marked up original legislation (the
``Philanthropic Enterprise Act of 2015'') on February 11, 2015,
and, with a majority present, ordered the bill favorably
reported.
Need for legislative action.--In recent years, a new type
of philanthropy has combined private sector entrepreneurship
with charitable giving, such as through the donation of a
private company's after-tax profits to charity. The Committee
believes it is appropriate to encourage this form of
philanthropy by eliminating certain legal impediments to its
use, while also ensuring that private individuals cannot
improperly benefit from charitable dollars. The Committee
therefore believes it is appropriate to create an exception to
the present-law private foundation excess business holdings
rules for certain philanthropic business holdings. By so doing,
the law will permit private philanthropists to bequeath an
entire business to a private foundation, provided that the
after-tax profits of the business will be paid to the
foundation and certain other requirements are satisfied, while
also ensuring that the donor's heirs cannot improperly benefit
from the arrangement.
II. EXPLANATION OF THE BILL
A. Provide an Exception to the Private Foundation Excess Business
Holdings Rules for Certain Philanthropic Business Holdings (sec. 2 of
the bill and sec. 4943 of the Code)
PRESENT LAW
Public charities and private foundations
An organization qualifying for tax-exempt status under
section 501(c)(3) of the Internal Revenue Code of 1986, as
amended (the ``Code'') is further classified as either a public
charity or a private foundation. An organization may qualify as
a public charity in several ways.\1\ Certain organizations are
classified as public charities per se, regardless of their
sources of support. These include churches, certain schools,
hospitals and other medical organizations (including medical
research organizations), certain organizations providing
assistance to colleges and universities, and governmental
units.\2\ Other organizations qualify as public charities
because they are broadly publicly supported. First, a charity
may qualify as publicly supported if at least one-third of its
total support is from gifts, grants or other contributions from
governmental units or the general public.\3\ Alternatively, it
may qualify as publicly supported if it receives more than one-
third of its total support from a combination of gifts, grants,
and contributions from governmental units and the public plus
revenue arising from activities related to its exempt purposes
(e.g., fee for service income). In addition, this category of
public charity must not rely excessively on endowment income as
a source of support.\4\ A supporting organization, i.e., an
organization that provides support to another section 501(c)(3)
entity that is not a private foundation and meets certain other
requirements of the Code, also is classified as a public
charity.\5\
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\1\The Code does not expressly define the term ``public charity,''
but rather provides exceptions to those entities that are treated as
private foundations.
\2\Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through
(iv) for a description of these organizations).
\3\Treas. Reg. sec. 1.170A-9(f)(2). Failing this mechanical test,
the organization may qualify as a public charity if it passes a ``facts
and circumstances'' test. Treas. Reg. sec. 1.170A-9(f)(3).
\4\To meet this requirement, the organization must normally receive
more than one-third of its support from a combination of (1) gifts,
grants, contributions, or membership fees and (2) certain gross
receipts from admissions, sales of merchandise, performance of
services, and furnishing of facilities in connection with activities
that are related to the organization's exempt purposes. Sec.
509(a)(2)(A). In addition, the organization must not normally receive
more than one-third of its public support in each taxable year from the
sum of (1) gross investment income and (2) the excess of unrelated
business taxable income as determined under section 512 over the amount
of unrelated business income tax imposed by section 511. Sec.
509(a)(2)(B).
\5\Sec. 509(a)(3). Organizations organized and operated exclusively
for testing for public safety also are classified as public charities.
Sec. 509(a)(4). Such organizations, however, are not eligible to
receive deductible charitable contributions under section 170.
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A section 501(c)(3) organization that does not fit within
any of the above categories is a private foundation. In
general, private foundations receive funding from a limited
number of sources (e.g., an individual, a family, or a
corporation).
The deduction for charitable contributions to private
foundations is in some instances less generous than the
deduction for charitable contributions to public charities. In
addition, private foundations are subject to a number of
operational rules and restrictions that do not apply to public
charities, as well as a tax on their net investment income.\6\
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\6\Unlike public charities, private foundations are subject to tax
on their net investment income at a rate of two percent (one percent in
some cases). Sec. 4940. Private foundations also are subject to more
restrictions on their activities than are public charities. For
example, private foundations are prohibited from engaging in self-
dealing transactions (sec. 4941), are required to make a minimum amount
of charitable distributions each year (sec. 4942), are limited in the
extent to which they may control a business (sec. 4943), may not make
speculative investments (sec. 4944), and may not make certain
expenditures (sec. 4945). Violations of these rules result in excise
taxes on the foundation and, in some cases, may result in excise taxes
on the managers of the foundation.
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Excess business holdings of private foundations
Private foundations are subject to tax on excess business
holdings.\7\ In general, a private foundation is permitted to
hold 20 percent of the voting stock in a corporation, reduced
by the amount of voting stock held by all disqualified persons
(as defined in section 4946). If it is established that no
disqualified person has effective control of the corporation, a
private foundation and disqualified persons together may own up
to 35 percent of the voting stock of a corporation. A private
foundation shall not be treated as having excess business
holdings in any corporation if it owns (together with certain
other related private foundations) not more than two percent of
the voting stock and not more than two percent in value of all
outstanding shares of all classes of stock in that corporation.
Similar rules apply with respect to holdings in a partnership
(substituting ``profits interest'' for ``voting stock'' and
``capital interest'' for ``nonvoting stock'') and to other
unincorporated enterprises (by substituting ``beneficial
interest'' for ``voting stock''). Private foundations are not
permitted to have holdings in a proprietorship. Foundations
generally have a five-year period to dispose of excess business
holdings (acquired other than by purchase) without being
subject to tax.\8\ This five-year period may be extended an
additional five years in limited circumstances.\9\ The excess
business holdings rules do not apply to holdings in a
functionally related business or to holdings in a trade or
business at least 95 percent of the gross income of which is
derived from passive sources.\10\
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\7\Sec. 4943. Taxes imposed may be abated if certain conditions are
met. Secs. 4961 and 4962.
\8\Sec. 4943(c)(6).
\9\Sec. 4943(c)(7).
\10\Sec. 4943(d)(3).
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The initial tax is equal to five percent of the value of
the excess business holdings held during the foundation's
applicable taxable year. An additional tax is imposed if an
initial tax is imposed and at the close of the applicable
taxable period, the foundation continues to hold excess
business holdings. The amount of the additional tax is equal to
200 percent of such holdings.
REASONS FOR CHANGE
In recent years, a new type of philanthropy has combined
private sector entrepreneurship with charitable giving, such as
through the donation of a private company's after-tax profits
to charity. The Committee believes it is appropriate to
encourage this form of philanthropy by eliminating certain
legal impediments to its use, while also ensuring that private
individuals cannot improperly benefit from charitable dollars.
The Committee therefore believes it is appropriate to create an
exception to the present-law private foundation excess business
holdings rules for certain philanthropic business holdings. By
so doing, the law will permit private philanthropists to
bequeath an entire business to a private foundation, provided
that the after-tax profits of the business will be paid to the
foundation and certain other requirements are satisfied, while
also ensuring that the donor's heirs cannot improperly benefit
from the arrangement.
EXPLANATION OF PROVISION
The provision creates an exception to the excess business
holdings rules for certain philanthropic business holdings.
Specifically, the tax on excess business holdings does not
apply with respect to the holdings of a private foundation in
any business enterprise that, for the taxable year, satisfies:
(1) the exclusive ownership requirements; (2) the ``all profits
to charity'' requirement; and (3) the independent operation
requirements.
The exclusive ownership requirements are satisfied if: (1)
all ownership interests in the business enterprise are held by
the private foundation at all times during the taxable year;
and (2) all the private foundation's ownership interests in the
business enterprise were acquired under the terms of a will or
trust upon the death of the testator or settlor, as the case
may be.
The ``all profits to charity'' requirement is satisfied if
the business enterprise, not later than 120 days after the
close of the taxable year, distributes an amount equal to its
net operating income for such taxable year to the private
foundation. For this purpose, the net operating income of any
business enterprise for any taxable year is an amount equal to
the gross income of the business enterprise for the taxable
year, reduced by the sum of: (1) the deductions allowed by
chapter 1 of the Code for the taxable year that are directly
connected with the production of the income; (2) the tax
imposed by chapter 1 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 independent operation requirements are met if, at all
times during the taxable year, the following three requirements
are satisfied. First, 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). Second, at
least a majority of the board of directors of the private
foundation are individuals other than individuals who are
either (1) directors or officers of the business enterprise or
(2) members of the family of a substantial contributor to the
private foundation. Third, there is no loan outstanding from
the business enterprise to a substantial contributor to the
private foundation or a family member of such contributor. For
purposes of the independent operation requirements,
``substantial contributor'' has the meaning given to the term
under section 4958(c)(3)(C), and family members are determined
under section 4958(f)(4). The provision does not apply to the
following organizations: (1) donor advised funds or supporting
organizations that are subject to the excess business holdings
rules by reason of section 4943(e) or (f); (2) any trust
described in section 4947(a)(1) (relating to charitable
trusts); or (3) any trust described in section 4947(a)(2)
(relating to split-interest trusts).
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2014.
III. BUDGET EFFECTS OF THE BILL
A. Committee Estimates
In compliance with paragraph 11(a) of rule XXVI of the
Standing Rules of the Senate and section 308(a)(1) of the
Congressional Budget and Impoundment Control Act of 1974, as
amended (the ``Budget Act''), the following statement is made
concerning the estimated budget effects of the revenue
provisions of the ``Philanthropic Enterprise Act of 2015'' as
reported.
The provisions are estimated to have a negligible effect on
Federal fiscal year budget receipts for the period 2015-2025.
B. Budget Authority and Tax Expenditures
Budget authority
In compliance with section 308(a)(1) of the Budget Act, the
Committee states that no provisions of the bill as reported
involve new or increased budget authority.
Tax expenditures
In compliance with section 308(a)(1) of the Budget Act, the
Committee states that no provisions of the bill as reported
affect the levels of tax expenditures.
C. Consultation With Congressional Budget Office
In accordance with section 402 of the Budget Act, the
Committee advises that the Congressional Budget Office has not
submitted a statement on the bill. The letter from the
Congressional Budget Office will be provided separately.
IV. VOTES OF THE COMMITTEE
In compliance with paragraph 7(b) of rule XXVI of the
Standing Rules of the Senate, the Committee states that, with a
majority present, the ``Philanthropic Enterprise Act of 2015,''
was ordered favorably reported by voice vote on February 11,
2015.
V. REGULATORY IMPACT AND OTHER MATTERS
A. Regulatory Impact
Pursuant to paragraph 11(b) of rule XXVI of the Standing
Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact that might be
incurred in carrying out the provisions of the bill as amended.
Impact on individuals and businesses, personal privacy and paperwork
The bill provides an exception to the private foundation
excess business holdings rules for certain philanthropic
business holdings. The provisions of the bill are not expected
to impose additional administrative requirements or regulatory
burdens on individuals or businesses.
The provisions of the bill do not impact personal privacy.
B. Unfunded Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the tax provisions of the
reported bill do not contain Federal private sector mandates or
Federal intergovernmental mandates on State, local, or tribal
governments within the meaning of Public Law 104-4, the
Unfunded Mandates Reform Act of 1995. The costs required to
comply with each Federal private sector mandate generally are
no greater than the aggregate estimated budget effects of the
provision.
C. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (``IRS Reform Act'') requires the
staff of the Joint Committee on Taxation (in consultation with
the Internal Revenue Service and the Treasury Department) to
provide a tax complexity analysis. The complexity analysis is
required for all legislation reported by the Senate Committee
on Finance, the House Committee on Ways and Means, or any
committee of conference if the legislation includes a provision
that directly or indirectly amends the Internal Revenue Code
and has widespread applicability to individuals or small
businesses. The staff of the Joint Committee on Taxation has
determined that there are no provisions that are of widespread
applicability to individuals or small businesses.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In the opinion of the Committee, it is necessary in order
to expedite the business of the Senate, to dispense with the
requirements of paragraph 12 of rule XXVI of the Standing Rules
of the Senate (relating to the showing of changes in existing
law made by the bill as reported by the Committee).
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