The private foundation that mega-star Paul Newman founded was instrumental in changing federal law to allow private foundations to own for-profit companies.

The change, which has come to be known as the Newman’s Own exception, was enacted in February but has received little attention. Prior to the exception being enacted, private foundations were prohibited from owning more than 20 percent voting interest in for-profit companies, or 35 percent voting interest under rare circumstances.

To qualify to use the exception, the for-profit company must meet strict guidelines. Newman’s Own brand of foods and other household products meets the requirements.

Newman’s Own Foundation had been lobbying for the law for nearly a decade.

Newman was co-founder of the food label and, on his death in 2008, he 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.

“The law banning ownership of for-profit companies by private foundations had been in existence for decades,” said Steven Chidester, partner on the private client and tax team who represents tax-exempt organizations at Withers Bergman, an international law firm. “Congress did not want foundations controlling for-profit companies.”

The exception now allows foundations to own for-profit companies if 100 percent of the profits go to charity, the company is independently controlled and operated, among other requirements.

“I have had a few clients ask about the exception but, once we explored it, they did not meet the requirements,” said Chidester. “Once the law becomes better known we may see more inquiries. The change gives foundations an additional opportunity [to give to charity] when it is done prudently. It is ideally suited for people who are founders of a business who want the business to continue to exist and to benefit charity.”

Jeffrey Haskell, chief legal officer for Foundation Source, which helps in the creation and administration of private foundations, said the change in the law presents "a narrow opening for planning opportunities that makes sense for some. If a person has a business and a philanthropic bent, he or she can lock in the philanthropy after death. It is not going to happen every day."

Haskell said Foundation Source has one client who may be able to benefit from the exception and the organization will advise the client of the opportunity.