Charitable Bequest of a Business and the Problems That Follow
by James F. McDonough, Jr. on September 23, 2013
It is not difficult to leave a business to charity, one makes a bequest. The difficulty, however, arises from the administrative and compliance issues faced as a result of such a charitable bequest make it impractical in most instances. The Internal Revenue Code (IRC) imposes numerous restrictions on these tax practices and discourages non-profit organizations from competing directly against for-profit companies in commercial setting. (Imagine the competitive advantage you would have if your business were not subject to income tax.)
IRC §4943 prohibits private foundations from having excess business holdings in a business enterprise. A private foundation is a type of exempt organization that receives substantial support from only a few contributors or sources. Unlike many of the well-known public charities that receive contributions from thousands of people, a private foundation is controlled by a few substantial contributors. The IRC imposes tighter restrictions upon private foundations because of the absence of public oversight and de facto control by the contributors is suspect in the eyes of the IRS.
There are two exceptions. First, a business whose income is substantially (95% or more) passive in character. This makes sense because the IRC has the opportunity to tax a corporation that pays dividends, so there is no fear that business income will escape taxation.
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