49–010 

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. 


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1The Code does not expressly define the term ‘‘public charity,’’ but rather provides exceptions 

to those entities that are treated as private foundations. 2Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through (iv) for a description of these organizations). 3Treas. 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). 

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 BUSI- NESS 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 


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4To 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). 5Sec. 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. 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. 7Sec. 4943. Taxes imposed may be abated if certain conditions are met. Secs. 4961 and 4962. 

8Sec. 4943(c)(6). 

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

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

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 


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9Sec. 4943(c)(7). 

10Sec. 4943(d)(3). 

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

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; 


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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. 


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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 proviVerDate Sep 11 2014 06:58 Apr 17, 2015 Jkt 049010 PO 00000 Frm 00006 Fmt 6659 Sfmt 6602 E:\HR\OC\SR020.XXX SR020

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sions 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). 

Æ 


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