Reconsidering Private Foundation Investment Limitations

Posted: 27 Dec 2005


Private foundations - a type of charitable organization that does not enjoy broad public support - are constrained in their investment choices by the threat of two special excise taxes imposed by sections 4943 and 4944 of the IRC. The first of these imposes confiscatory sanctions on foundations that hold more than 20% of the voting stock of a corporation. The second, in effect, imposes sanctions on foundations whose investments are deemed excessively risky.

In the author's view, these constraints need to be re-examined. Upon performing such a re-examination, the author concludes with respect to section 4943 - the so-called "excess business holdings" rules - that the overall limit of 20% is not necessarily problematic, but that its application with the use of an attribution rule is defective. Under the attribution rule, stock held by "disqualified persons" with respect to the foundation are attributed to that foundation for purposes of applying the 20% test. Among other things, this severely limits the amount of stock that a family foundation can hold in a corporation controlled by the family, and may in turn limit the amount of stock that the family members are willing to contribute for charitable purposes. In the author's view, the excess business holding rules can serve any legitimate purposes they may have if applied with this attribution rule.

With respect to section 4944 - the so-called "jeopardizing investments" rules - the author contends that the rules induce foundations to adopt an excessively conservative investment orientation, potentially denying them the opportunity to achieve returns that include reasonable risk premiums. Even when the rules are not affirmatively counterproductive, they are vague and unnecessary, and should simply be repealed.

Suggested Citation

Schmalbeck, Richard L., Reconsidering Private Foundation Investment Limitations. Tax Law Review, Vol. 58, No. 1, 2005. Available at SSRN:

Richard L. Schmalbeck (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States
919-613-7078 (Phone)
919-613-7231 (Fax)

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