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IRS LETTER RULINGS Letter Ruling Alert by Lloyd H. Mayer, Caplin - PDF document

IRS LETTER RULINGS Letter Ruling Alert by Lloyd H. Mayer, Caplin & Drysdale A New Option for Private Foundation of typical foundation investments: cash, cash equivalents, U.S. government obliga- Investing tions, corporate debt


  1. IRS LETTER RULINGS Letter Ruling Alert by Lloyd H. Mayer, Caplin & Drysdale A New Option for Private Foundation of typical foundation investments: cash, cash equivalents, U.S. government obliga- Investing tions, corporate debt securities, equity mu- Introduction tual funds, and publicly traded corporate Section 4943 limits the percentage inter- stock. est that a private foundation, in combination Photo not available. Photo not available. The purpose of the general partnership with its disqualified persons, can hold in a was to enable the foundations to pool their “business enterprise.” In a recent private let- funds in order to allow them to invest in ter ruling, 199939046 (for the full text, see equity interests in private businesses and p. 274), the Service examined the definition private equity funds not otherwise available of the term “business enterprise” in the con- to them, and to achieve greater diversifica- text of an investment partnership created by tion in investments. Such investments gen- a group of related foundations. Looking be- Lloyd H. Mayer erally were not available to the foundations yond the statute’s literal language to its un- individually, except possibly to the one or derlying purposes, the Service concluded two largest foundations, because the invest- that the partnership was not a “business enterprise” for pur- ments generally required investors to have a minimum finan- poses of section 4943. cial size and to make a minimum dollar commitment for administrative and securities laws reasons. These investments Facts generally would be made by purchasing limited partnership The ruling involved 15 private foundations. The private interests. The foundations’investment management company foundations were disqualified persons with respect to each would not manage any of the limited partnerships. other under section 4946(a)(1)(H). The foundations anticipated that they might create a new The subject of the ruling request was an investment plan investment partnership along these lines each year. The crea- proposed by the foundations. The foundations planned to tion of new partnerships each year would allow each foun- form a general partnership in order to make certain invest- dation to determine its need for these types of investments ments. Each foundation would make a maximum dollar on an annual basis, without complicating the administration commitment to the partnership, and the partnership would of the existing investment partnerships. issue capital calls to the foundations in proportion to their The general partnership agreement contained a number of commitments as investment opportunities arose. Participation significant limitations on the partnership’s activities. Only in distributions and allocation of profits and losses would be private foundations could be partners. The partnership agreed in the same proportion. The capital calls would not exceed not make any investments that would result in excess business the initial commitment amounts, but funding of the capital holdings by a foundation partner and its disqualified persons calls up to those amounts would be mandatory upon the under section 4943, to not directly engage in an operating request of the manager partner. The managing partner would business, and to not make any jeopardizing investments that be one of the foundations; this foundation would also make would subject one or more of the foundation partners to tax payments to the partnership to cover the partnership’s admin- under section 4944. The partnership also agreed not to engage istrative costs. The same company that provided investment in property or credit transactions with any disqualified per- management services to the foundations individually would sons of the foundation partners that would constitute self- provide investment management and administrative services dealing under section 4941(d)(1)(A) and (B), or to purchase to the partnership at no charge. While not stated explicitly in or sell investments in an attempt to provide an advantage to the ruling, the Service’s analysis makes it clear that this a disqualified person. 1 The partnership also planned to not company was a disqualified person with respect to all of the hold more than a 20 percentinterestinanylimitedpartnership. foundations. Each foundation would determine its maximum dollar The partnership was not, however, limited to receiving commitment based on its own investment portfolio, but it passive income, such as dividends, interests, royalties, and was anticipated that such commitment would not exceed 20 rents, through its limited partnership interests. In fact, it was percent of the foundation’s total investment portfolio. Each anticipated that some of the limited partnerships would en- foundation’s other investments would include the normal mix gage in active trade or businesses, and that the foundations The Exempt Organization Tax Review November 1999 — Vol. 26, No. 2 257

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