[co-author: Zachary J. Crain, Special Counsel]
Outside-the-box-thinking could give private foundations a reason to be excited about an obscure provision in the tax bills passed by the House and currently pending in the Senate.
The Birth of “Philanthro-sales”
Paul Newman founded and ran a successful for-profit food company called Newman’s Own. Newman’s Own started a trend in the United States by advertising that all of the company’s profits were given to charity. “Philanthro-sales” was born! When Paul died, he gave Newman’s Own to a private foundation controlled by people he trusted to ensure that it continued to be philanthropic.
Private Foundations: Unique Creatures of Federal Tax Law
Unlike public charities—which are supposed to be governed by a broad, community-facing board of directors—private foundations can be tightly controlled by family members or by a company. The trade-off for such tight control is that the activities of private foundations are limited to giving away money to public charities.
Private foundations have long been prohibited from owning more than 20% of a for-profit business for longer than five years. This was the case with Paul Newman’s plan, but he and his attorneys were betting on the ability of Newman’s Own to convince Congress to change the federal tax law.
Newman’s Own Exception
It looks like Paul’s bet will pay off. Both the Senate bill and the version passed by the House tax include a new provision that would allow private foundations to own a for-profit company. The language is complicated (of course). It requires that the private foundation owns 100% of the for-profit entity and that all of the net profits (after taxes) from the company go to the foundation. It also requires some separation between the private foundation and the for-profit company, language that appears to prevent private foundation insiders from personally benefiting from the company’s activities.
If the tax bill passes, the Newman’s Own exception to the private foundation rules could provide a new venue for mission-motivated, for-profit entities to be owned by a family or other private foundation; and may enable foundations to expand the creative ways in which they develop community partnerships.
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