Tax Rule Tweak: How Foundations Count Employee-Owned Stock After Buybacks is Changing

Alright, let's break down a new piece of legislation called the "Reduction of Excess Business Holding Accrual Act." In plain English, this bill fiddles with the tax rules for private foundations – you know, those charitable organizations often set up by families or companies. Specifically, it changes how these foundations count their ownership in businesses, especially when those businesses buy back stock from their own employees through an Employee Stock Ownership Plan (ESOP).

The Nitty-Gritty: ESOPs and Foundation Holdings

So, what's the core change here? The bill amends Section 4943(c)(4)(A) of the Internal Revenue Code. This section basically limits how much of a business a private foundation can own without facing extra taxes on "excess business holdings." The new rule says that if a company buys back its own stock from its ESOP, that stock can, under certain conditions, still be treated as if it's out there and owned by someone for the purpose of calculating the foundation's ownership percentage. This is a bit counterintuitive, as normally, when a company buys back its stock (and holds it as treasury stock, cancels, or retires it), that stock is no longer considered outstanding.

For this special treatment to apply, a few things need to be true according to the bill:

• The stock can't be easily bought or sold on a public market (like the New York Stock Exchange).
• The company must have bought the stock on or after January 1, 2020, from its ESOP as part of a distribution to an employee.
• The repurchased stock has to be held as treasury stock, cancelled, or retired by the business.

Think of it like this: if a foundation owns a chunk of a private, employee-owned company, and that company buys shares back from a departing employee who got them through the ESOP, this bill could allow the foundation to calculate its ownership percentage in a way that might prevent it from tripping the "excess holdings" wire.

Strings Attached: The Limits and Timing

Now, this isn't a free-for-all. The bill includes some important guardrails. First, this special counting method can't be used if it would push the foundation's permitted holdings above 49% of the business. The law already has rules about how much a foundation can own, and this new provision respects those upper limits.

Second, there's a rule about new ESOPs: this change doesn't apply if the stock was bought from an ESOP that's less than 10 years old. This seems aimed at preventing brand-new ESOPs from being used in a way that immediately benefits foundations under this rule. There's also a technical bit stating that one part of the existing law (clause (ii) about percentage decreases) won't apply because of a new clause (clause (v)) introduced by this bill – essentially ensuring the new rule works as intended without an old rule interfering.

This change will kick in for taxable years ending after the date the bill is officially signed into law. So, it's not retroactive to 2020 for past tax filings, but it will apply to the current or upcoming tax year once enacted.

Real-World Ripple Effects

Who does this really affect? Primarily, it's private foundations that have investments in businesses with established ESOPs, and, of course, those businesses themselves. For a foundation, it could mean a bit more breathing room. If a company they've invested in is actively using its ESOP and buying back shares, this change might make it easier for the foundation to maintain its investment without triggering extra taxes.

For example, imagine a local community foundation has a significant stake in a successful regional manufacturing company that is also employee-owned through an ESOP. When employees retire, the company buys back their ESOP shares. Without this bill, those buybacks could slowly increase the foundation's percentage ownership (as the total number of outstanding shares decreases), potentially pushing them into "excess holding" territory. This bill provides a mechanism where those repurchased shares might still be counted in a way that keeps the foundation's percentage stable or lower for tax purposes, as long as all the conditions are met.

Ultimately, this is a fairly technical adjustment to the tax code. It’s not creating a giant new program, but it's refining how existing rules apply in a specific scenario involving employee ownership and foundation investments. The goal seems to be to avoid penalizing foundations when companies they invest in engage in common ESOP-related transactions, provided those transactions meet the bill's specific criteria.