New Tax Exception Eases Ownership Rules for Private Foundations Holding ESOP-Owned Companies

This bill, officially titled the Reduction of Excess Business Holding Accrual Act, is highly technical, but it’s a big deal for a very specific type of company structure. Basically, it changes a key tax rule (Section 4943 of the Internal Revenue Code) that limits how much of a private business a private foundation can own. If a foundation owns ‘excess business holdings,’ it gets hit with a hefty tax penalty. This bill carves out a new exception related to Employee Stock Ownership Plans (ESOPs).

The ESOP Loophole

The core of the change is this: When a business buys back its own stock from an ESOP—say, when employees retire or cash out—that repurchased stock generally won't count against the private foundation’s ownership limit calculation. This is a huge deal because it gives foundations and the companies they are tied to more flexibility in managing stock buybacks without accidentally triggering a massive tax penalty from the IRS. This exception applies to stock purchased after January 1, 2020, provided the stock isn't easily traded on a public market.

The Fine Print: Who Benefits and Why

This isn't a free-for-all. The bill builds in a few guardrails. First, the exception only works if the foundation’s total ownership stake remains below 49 percent of the company. If counting the repurchased stock pushes them over that 49% cap, the exception is off the table. Second, the business must hold onto the repurchased stock as treasury stock, cancel it, or retire it, ensuring it doesn't just get resold immediately. Finally, the exception doesn’t apply if the buyback happens within the first 10 years of the ESOP’s existence. For the foundations that own stakes in these closely held, ESOP-structured companies, this provision simplifies compliance and provides breathing room during corporate restructuring.

The Real-World Impact: Flexibility vs. Oversight

For the average person, this bill won't change your weekly paycheck, but it does affect the regulatory landscape for large, complex corporate structures. The original 'excess business holdings' rule was designed to prevent private foundations—which are tax-exempt—from exerting too much control over active businesses. This new exception, while logical in the context of managing ESOP transitions, essentially reduces the regulatory scrutiny on the foundation's total involvement in the business, as laid out in Section 4943(c)(4)(A).

This creates a bit of a tightrope walk. On one hand, it helps companies and foundations manage stock transitions smoothly, which is good for stability. On the other hand, it makes the IRS’s job of tracking ownership even more complex, and it slightly lowers the guardrail designed to keep tax-exempt foundations from becoming too deeply embedded in the day-to-day operations of a for-profit company. While the 49% cap is a decent safety net, the general trend here is toward more structural complexity and less visibility for regulators regarding true ownership influence.