[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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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).

                                  [all]