Newman’s Own tax break
It sells pasta sauce, lemonade, and 31 kinds of salad dressing with Paul Newman’s face splashed prominently on the label. Its profits go entirely to charity. And, if the GOP tax bill passes, it will more or less have a section of the U.S. tax code all to itself.
The Newman’s Own Foundation isn’t mentioned in the Senate or House tax bills by name, but appears to be the target of a specific carveout—among the many highly targeted breaks and exemptions in the new GOP tax plans.
The unusual structure of the Newman’s Own Foundation, a nonprofit charity that wholly owns a for-profit food company, leaves it vulnerable to a punitive 200 percent tax that would break up the arrangement, and for the past nine years it has spent hundreds of thousands of dollars lobbying Congress to change U.S. law so it can be exempt.
In this fall’s tax overhaul, it looks like Congress is complying. Both the House and Senate tax bills contain a small provision with an almost impenetrable title—an “exception to the private foundation excess business holdings rules for philanthropic business holdings”—that would let the foundation keep owning the company without the tax penalty. The carveout, sponsored by Sen. John Thune (R-S.D.) and Rep. Dave Reichert (R-Wash.), could spare another 20 to 30 foundations that would face a similar fate in the future.
For Newman’s Own, based in Westport, Conn., the problem appears to have originated with Paul Newman himself. The legendary actor founded the food company Newman’s Own in 1993 with a mission to give all the company’s profits to charity. When he died, in 2008, he left the company to his private foundation so that his philanthropic legacy could survive. The company is still healthy; Newman’s Own doesn’t provide information on revenue or profits, but the foundation has recently donated $26 to $30 million a year to charity, including $29 million last year to organizations working on issues such as nutrition and support for veterans. (Newman served in the Navy in World War II.)
But that structure has been a problem since the inception. Thanks to laws passed almost 50 years ago to prevent company owners from creating bogus tax shelters—and to ensure for-profit companies remain focused on making money—a private foundation isn’t allowed to own more than 35 percent of a for-profit company for more than five years. If the Newman’s Own Foundation didn’t reduce its ownership of the food company within that period, it would be hit with a stiff penalty—a 200 percent tax on the value of the food company above the foundation’s permitted ownership stake, intended to force the foundation to divest most of the company. In 2013, when the five-year deadline hit, the foundation got a five-year extension from the Internal Revenue Service. That expires next November, when the tax would kick in.
“We have absolutely run out of time. There is no way that anybody can give us more time,” said Bob Forrester, the CEO of the Newman’s Own Foundation. “There was only that one extension allowed. For us, it’s really existential.”
The exemption for private foundations that wholly-own for-profit companies is minor in the broader GOP tax overhaul; congressional scorekeepers estimate it would raise a few million dollars a year. But it offers a vivid illustration of just why tax reform is so hard—and why the tax code is so long and complicated. By all accounts, no one opposes the exemption, and previous standalone legislation to create such an exemption has attracted bipartisan support. But qualifying for the exemption requires foundations to meet a complicated, three-part test, written into the tax code, to ensure the company-nonprofit relationship isn’t a tax dodge—which is only going to add pages to the tax code and provide more business for tax lawyers.
Though Newman’s Own has been the chief driver of the changes, supporters say that the exemption matters far beyond just one foundation, and could give momentum to a new wave of innovative companies with philanthropic missions. Michael Pirron, the founder of the technology consulting company Impact Makers, has run into the same problem with his own firm. He founded Impact Makers with the intention of donating all its profits to charity—easy enough with him at the helm, but hard to guarantee when leadership passed to future executives. If he gifted full ownership of the company to a private foundation, that foundation would face a huge tax bill in just five years.