1. Helene S. Jaron Vice Chair, Private Client Services Cozen O’Connor
Baker Tilly Estate and Trust Conference Leaving Business Assets to Charities
Helene S. Jaron
Vice Chair, Private Client Services
Cozen O’Connor
June 1, 2018

2. Charitable Beneficiaries
Private Foundations
Charitable Remainder Trusts
Donor Advised Funds
Public Charities

3. Private Foundations Excess business holdings
There is a penalty tax imposed on private foundations that acquire assets treated as excess business holdings. In addition to a tax on the foundation, there is a further tax if the transaction is not “corrected” (disposed of to someone not a disqualified person to the foundation) within a certain period of time and another tax imposed on the managers of the foundation. Disclosure is required on the foundation’s annual tax returns. The tax if the transaction is not corrected is 200% of the value of the investment.
Five (5) year grace period for interest acquired by gift or bequest.

4. Newman Exception – Section 4943(g)(included in Bipartisan Budget Act of 2018)
The foundation owns 100% of the business voting stock.
All of the foundation’s interest must have been acquired by gift or bequest.
All of the business NOI is distributed to the foundation within 120 days of the end of each tax year.
No substantial contributor or family member of the contributor to the foundation is a director, officer, trustee, manager, employee or contractor of the business enterprise.
At least a majority of the foundation’s board are persons that are not directors or officers of the business or family members of a substantial contributor.
There is no outstanding loan from the business to a substantial contributor or his or her family members.

5. Unrelated Business Income Tax
Unrelated business taxable income (UBTI) was introduced in 1950 to ensure that tax-exempt businesses competed fairly with taxable companies in profit generating activities.
Gross income of an exempt organization is subject to UBTI if: (1) the income is derived from the conduct of a trade or business; (2) the business is regularly carried on; and (3) the conduct of the business activity is not substantially related (other than through the production of funds) to the exercise or performance of the organization's exempt function.
Generally, such income is subject to tax at the regular corporate rates. Exempt trusts are taxable at trust rates.

6. Self-Dealing
Generally, private foundations cannot engage in transactions with persons or entities that are their principal sources of contributions (“disqualified persons”). The definition of a disqualified person includes the donors, members of their families, business entities owned by them (at a 35% level of ownership), employees of the foundation, and other related persons.
If a private foundation engages in an act of self-dealing, there is a penalty tax, a tax on the foundation manager, a requirement that the transaction be corrected (undone) within a very short period, and another penalty tax if the transaction is not undone. The structure of the penalty taxes is similar to the taxes on excess business holdings, including the 200% penalty tax.
Making a loan to a disqualified person is an act of self-dealing.
The sale, exchange or lease of property with a disqualified person is also an act of self-dealing.

7. There is an exception for self-dealing that occurs during estate settlement, referred to as the estate exception. This exception provides that indirect self-dealing does not include a transaction with respect to a private foundation's interest in estate property, regardless of when title to the property vests under local law, if:
The administrator or trustee either possesses a power of sale with respect to the property, has the power to reallocate the property, or is required to sell the property under the terms of any option subject to which the property was acquired;
The transaction is approved by the probate court having jurisdiction over the estate (or by another court having jurisdiction over the estate (or trust) or over the private foundation);
The transaction occurs before the estate is considered terminated for federal income tax purposes;

8. The estate or trust receives at least the fair market value (FMV) for the foundation's interest or expectancy in the property; and
The transaction results in the foundation's receiving an interest or expectancy at least as liquid as the one it previously had; the transaction results in the foundation's receiving an asset related to the active carrying out of its exempt purposes; or the transaction is required under the terms of an option that is binding upon the trust or estate.

9. Charitable Remainder Trust
Definition. A charitable remainder trust (CRT) is a trust that pays an annuity or percentage amount (known as a unitrust, if the trust agreement calls for a percentage payout) to a designated beneficiary for a term of years (not to exceed 20) or the life of the beneficiary, with the remainder passing to a charity selected by the trust’s settlor.
Excess business holdings
CRTs are subject to the excess business holdings regulations.
May qualify for exception under Section 4947(b)(3).
Unrelated Business Income Tax
If a CRT has unrelated business taxable income (UBTI) for a tax year, an excise tax equal to the amount of the UBTI is imposed on the trust. In effect, this amounts to a 100% excise tax on UBTI.

10. Self-Dealing
Treated in the same manner as a private foundation.

11. Donor Advised Funds
Treated in the same manner as a private foundation.
Caveat: the estate exception to the self-dealing regulations is not applicable to donor advised funds.