Case:

Lucky Lucy Lindstrom finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor (RIA) and began advising clients. Lucy also managed her own investments. With her keen insight into financial markets, Lucy soon began to move from traditional stocks and bonds into futures and commodities markets. Lucy was so successful in these markets that she now only manages her own large personal portfolio. Somewhat late in life, Lucy discovered the wonderful world of philanthropy. She volunteered at her favorite charity and learned that giving someone in need a helping hand is even more gratifying than making another million in the futures market.

Lucy had invested $1,000,000 in stock in a renewable energy company with the name Northern Long Shot, Inc. This company designs and manufactures energy solutions for companies across the far north. Recently, the stock rose from the $1 per share that she paid to over $5 per share. After this success, Northern Long Shot decided to "spin off" a smaller company with a portion of their energy systems. The new company was called Northern Long Shot II. Lucy exchanged her $5 million in stock for 60% of the stock in Northern Long Shot II. After the exchange, Lucy decided to give Northern Long Shot II's stock to a private charitable foundation to help those in need.

Lucy discussed several options with her attorney. She asked her attorney about the ability of her private foundation to keep the Northern Long Shot II stock long term since she believed it was a good investment. Her attorney noted that private foundations are subject to various rules on self-dealing, minimum distributions and excess business holdings.

Question:

Lucy said, "Wow! There are a lot of rules for private foundations. Can my private foundation continue to own Northern Long Shot II stock?"

Solution:

Her attorney explained that under the excess business holdings rules, Lucy's private foundation is permitted to hold no more than 20% of a corporation's voting stock or business interest. The limit is increased to 35% where a third person has effective control of the enterprise. There is a de minimus exception to the excess business holdings rule if the private foundation holds no more than 2% of the voting stock and no more than 2% of the value of all the outstanding shares of stock. Sec. 4943(c)(2).

After the gift of Lucy's stock, her private foundation owns 60% of Northern Long Shot II's stock, thus the excess business holdings rules will apply. Because Lucy's private foundation acquired the stock by gift, there is a five-year grace period to dispose of the stock and comply with the excess business holdings rules. Sec. 4943(c)(6).

Lucy's private foundation held the stock for three years. At the end of that time, the other shareholders decided to purchase the Northern Long Shot II stock from the private foundation for $7 million. Lucy's foundation then invested these funds and makes generous gifts each year to those in need.