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Revenue Ruling 81-111

1981-1 C.B. 509 (1981)

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Revenue Ruling 81-111

Internal Revenue Service
1981-1 C.B. 509 (1981)

Facts

The Internal Revenue Service (IRS) sought to provide guidance about the operation of § 4943(c)(2)(B) of the Internal Revenue Code (code). Section 4943(c)(2)(B) raised the percentage limit of a corporation’s stock that a private foundation was permitted to hold if certain requirements were met. As part of its guidance, the IRS presented two variations on a hypothetical scenario concerning a private foundation that qualified for tax-exempt status under § 501(c)(3) of the code. Both variations involved corporations in which the foundation owned stock. In the first situation, (1) the foundation owned 15 percent of the corporation’s stock; (2) disqualified persons—that is, people with close ties to the foundation, such as a founding donor or an officer—owned another 20 percent; and (3) an individual with no connection to the foundation owned the remaining 65 percent. The individual with no connection to the foundation used his 65 percent stake to elect a majority of the corporation’s board members. In the second situation, the foundation again owned 15 percent of the corporation’s stock, and disqualified persons owned another 20 percent. However, the remaining 65 percent was widely held among many individuals, none of whom had sufficient personal holdings to exert influence on the corporation.

Rule of Law

Issue

Holding and Reasoning ()

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