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Newman's own

Newman’s Own Exception Quietly Passed

Will this well-intentioned provision end up being exploited?

On Feb. 9, 2018, President Trump signed the Bipartisan Budget Act of 2018, which unbeknownst to most included the Philanthropic Enterprise Act of 2017. The 2017 Act permits private foundations to own for-profit businesses if certain requirements are met. Prior to the passing of the 2017 Act, PFs were prohibited from owning more than a 20 percent voting interest (or in some instances, a 35 percent voting interest) in for-profit businesses. This legislation was most recently introduced in the Tax Cuts and Jobs Act of 2017, but didn’t make the final bill that passed in December. The 2017 Act is effective as of 2018. 

Newman’s Own Exception

The 2017 Act is also known as the “Newman’s Own Exception” because Newman’s Own Foundation, established by the late actor Paul Newman, has been lobbying for this legislation for the past nine years. Newman also co-founded the food company, Newman’s Own, Inc. in 1982, and on his death in 2008, left his entire interest in the company to his foundation. Under the prior rules, the foundation was required to divest itself of the business interest by November 2018. Now with this new exception, the foundation can continue to own and operate the business using the profits for its charitable causes.     

Three Most Important Requirements

New subsection (g) of Section 4943 of the Internal Revenue Code lists six requirements for a PF to own a for-profit business. Three most important of these provisions is that: (1) the business must be controlled by the PF through 100 percent ownership of the voting stock, (2) the PF can’t be controlled by the family members of the original creator of the PF and (3) all profits of the business must be distributed to the PF.

Still Unclear: How New Exception Will Be Used

Though the intention of this legislation appears to be in the right place, especially when it comes to the dilemma facing the Newman’s Own Foundation, creating a new general exception that applies to all PFs ultimately might not have the desired result. What remains to be seen is how this new exception will be used. The purpose of the prior law was to prevent wealthy families from using PFs as tax shelters for their business interests.  Until the Internal Revenue Service issues regulations, there’s considerable potential for the exploitation of the new provisions. But until then, let’s raise our glasses filled with Newman’s Own Lemonade to the Newman’s Own Foundation.

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