IRS Finally Approves Deductibility of Contributions to Domestic LLCs Wholly Owned by Charities

Tax practitioners have long believed that donations could be made to single member LLCs wholly owned by section 501(c)(3) organizations on the theory that, for tax purposes, the donation was treated as made to the charity and not the LLC.  In long awaited guidance, the IRS has finally agreed in Notice 2012-52.  The analysis in the notice is not surprising, and is in fact, exactly what tax practitioners have been arguing ever since disregarded entities came into existence.

Generally, a business entity that has a single owner and that is not a corporation is treated as disregarded as an entity separate from its owner.  These “business entities” are typically limited liability companies. If an entity is disregarded, its operations and activities are treated in the same manner as a sole proprietorship, branch, or division of the owner, and the owner generally reports all income, loss, deductions, and credits on its own tax return.   Thus, any contribution to a disregarded entity would be reported on the owner’s return as a contribution.  Practitioners believed that this result meant that the donor was treated as contributing to the charitable organization, rather than the LLC, and was thus entitled to a charitable contribution deduction.  Prior to the recent guidance, the IRS was unwilling to agree or disagree with this position.

On July 31, however, the IRS finally ruled that donations to a domestic single member LLC whose sole owner is a section 501(c)(3) organization will be treated as donations to a branch of the 501(c)(3) organization.  Accordingly, donors will be entitled to a charitable contribution deduction.  The IRS has also asked, but not required, that charities disclose in a acknowledgment or other statement to the donor that the single member LLC is wholly owned by a charity and treated by the charity as disregarded.



LLCs and the Charitable Deduction

Under the so-called “check the box regulations” a single member limited liability company (“SMLLC”) is disregarded for federal income tax purposes unless it elects to be taxed as a corporation.  Therefore, where a Section 501(c)(3) organization establishes a SMLLC that does not seek Section 501(c)(3) status or otherwise elect to be taxed as a corporation, the SMLLC is treated as a division of the 501(c)(3) organization for federal income tax purposes.   Strangely, the IRS has declined to rule whether a donation to a SMLLC qualifies as a deductible charitable contribution made to or for the use of a Section 501(c)(3) organization for purposes of Section 170.  The New York State Bar Association recently sent a report to the Treasury and the IRS in support of the position that contributions to such SMLLCs should be eligible for the charitable deduction.   I also believe that this is the appropriate treatment for federal income tax purposes and hope the IRS will be prompted to issue formal guidance soon and finally put this important issue to rest.


Rare IRS Guidance Regarding Single-Member LLCs

The IRS recently released an Information Letter (2010-0052) regarding the tax treatment of a single-member limited liability company (SMLLC) the sole member of which is a public charity.  The IRS confirmed the well-accepted position that a SMLLC is a “compontent part” of the exempt member which must treat the operations of the SMLLC as a branch or division.  The IRS went on to confirm that the SMLLC “receives the benefit of its owner’s tax-exempt status, including exemption from federal income tax, federal unemployment tax, and other federal taxes where applicable” but noted that a SMLLC is subject to certain federal excise taxes and employment taxes. 

The IRS also confirmed that a grant from a private foundation to a SMLLC the sole member of which is a public charity would be treated as a qualifying distirbution  and not a taxable expenditure, and expenditure responsibility generally will not have to be exercised by the private foundation.  The IRS has yet to confirm that a donation to a SMLLC the sole member of which is a Section 501(c)(3) organization is deductible under Section 170 of the Code, however, this Information Letter may be a step towards this long-awaited confirmation of which experts generally agree should be the result.

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