# Plain Language Summary: Reduction of Excess Business Holding Accrual Act

Private foundations—charitable organizations set up by wealthy individuals or families—face special tax rules that limit how much stock they can own in any single business. The government wants to prevent foundations from controlling companies, so there's a tax penalty if a foundation holds too much. This bill creates a narrow exception to those rules for a specific situation: when a company buys back its own stock from an employee stock ownership plan (ESOP).

Here's what's actually happening: When employees own company stock through an ESOP and that stock gets distributed to them, sometimes the company buys that stock back. Under current law, if a private foundation also owns stock in that same company, buying back employee stock could push the foundation's ownership percentage higher, triggering tax penalties. This bill says that when a company repurchases employee stock from an ESOP after January 1, 2020, the foundation won't be penalized as long as the foundation's total ownership doesn't exceed 49 percent. Essentially, the bill treats the repurchased stock as if it doesn't count toward the foundation's holdings in certain situations.

The practical impact is fairly limited. This mainly affects private foundations that own significant stakes in companies that also have employee stock ownership plans. For most people and small businesses, this won't matter at all. The change only applies to stock purchases made after 2020, and it specifically excludes the first ten years after an ESOP is created. The bill is designed to make it easier for companies to manage employee stock ownership without accidentally triggering tax penalties for any private foundation investors.

Reduction of Excess Business Holding Accrual Act

Steube, W. Gregory

Reduction of Excess Business Holding Accrual ActThis bill treats certain stock repurchased by a corporation from an employee stock ownership plan (ESOP) as outstanding voting stock for purposes of the federal excise tax imposed on a private foundation’s excess business holdings. Thus, a private foundation may exclude such stock in calculating present holdings in a corporation and liability for the excise tax. (Exceptions apply.)As background, a federal excise tax is imposed on a private foundation that owns&nbsp;more than 20% of the voting stock in a corporation, reduced by the percentage of voting stock held by all disqualified persons (excess business holdings). However, a private foundation with excess business holdings on May 26, 1969 (grandfathered private foundation) may own a greater percentage of voting stock in certain circumstances. Under the bill, stock is treated as outstanding voting stock if such stock is<ul><li>not readily tradable on an established securities market;</li><li>repurchased from an ESOP on or after January 1, 2020; and</li><li>held by the corporation&nbsp;as treasury stock, cancelled, or retired.</li></ul>However, such stock is not treated as outstanding voting stock if it is repurchased within the first 10 years of establishing the ESOP or, as a result of the repurchase, the permitted holdings of the private foundation would exceed 49% of the voting stock in the corporation.Finally, under the bill, such stock does not reduce the percentage of voting stock a grandfathered private foundation may own.